捷普科技 (JBL) 2009 Q3 法說會逐字稿

Good afternoon. I will be your conference operator today. At this time, I would like to welcome everyone to the Jabil third quarter fiscal year 2009 earnings call. (Operator Instructions). Thank you. Ms. Walters, you may now begin.

Thank you. Welcome to our third quarter of fiscal 2009 conference call. On the call with me today are President and CEO, Timothy Main and our Chief Financial Officer, Forbes Alexander. This call is being recorded and will be posted for audio playback on the Jabil website in the Investor section, along with today's press release and slide show presentation on the third quarter. You can follow our presentation with the slides that are posted on the website and begin with slide one now, our forward-looking statement.

During this conference call, we will be making forward-looking statements, including those regarding the anticipated outlook for our business, our currently expected fourth quarter of fiscal 2009 net revenue and earnings results, our long-term outlook for our Company, and improvements in our operational efficiency and financial performance. These statements are based on current expectations, forecasts and assumptions involving risks and uncertainties that could cause actual outcomes and results to differ materially. An extensive list of these risks and uncertainties are identified in our annual report on Form 10-K for the fiscal year ended August 31, 2008, on subsequent reports on Form 10-Q, and Form 8-K and our other securities filings. Jabil disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

Please turn now slides two and three for a discussion on the results for our third quarter of 2009. On revenues of $2.6 billion, our GAAP operating income was a loss of $7.8 million. This compares to $63.1 million GAAP operating income on revenues of $3 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 $29 million, or 1.1% of revenue, as compared to $85.3 million, or 2.8% for the same period in the prior year. Core earnings per diluted share were $0.04, as compared to $0.26 for the same period in the prior year. Please refer to slides four and five for a discussion of revenue by division and sector for the third fiscal quarter.

The AMS division revenue represented approximately 58%, or $1.5 billion, a sequential decline of 10% as compared to the second quarter of fiscal 2009. Core operating income for the division in the quarter was 1% of revenue. Sector results. Automotive declined 10% sequentially, and represented 3% of revenue in the quarter. Computing and storage decreased 17% from the second quarter, and represented 11% of revenue. Industrial, instrumentation and medical sector decreased 5% from the prior quarter, as a result of general market declines being somewhat offset by growth in Smart Meter related production. This sector represented 20% of revenue.

Networking sector levels of production decreased by 14% from the previous quarter, and represented 16% of overall revenues for the quarter. Declines in this sector were principally related to wireless network products unassociated with traditional enterprise markets. Telecommunications sector decreased 1% sequentially, and represented 6% of the quarter's revenue. The consumer division represented approximately 35% of revenues, or $900 million in the third fiscal quarter, a sequential decrease of 12%. Core operating income for the division in the quarter was 0.5% of revenue.

Sequential performance, displays decreased by 27% from the second quarter, and represented 4% of revenue, reflecting our continuing effort to rationalize the economic performance of this sector, and continuing weak demand across our European customer base. Mobility sector decreased by 12% from the prior quarter, and represented 21% of revenue in the quarter. Peripheral sector decreased by 8% from the second fiscal quarter, and represented 11% of revenue. Our Aftermarket Services division represented approximately 7% of overall Company revenue in the third fiscal quarter. This was growth of 11% from the prior quarter, and core operating income for the division was 10% of revenue in the quarter.

In the third fiscal quarter, two customers accounted for more than 10% of revenue, while our top 10 customers in the quarter accounted for approximately 59% of revenue. Selling, general and administrative expenses increased by $6 million, to $112 million for the quarter. Second quarter expenses were lower as a result of one-time expense reductions in areas such as recovery of legal fees and bonus, as the full impact of the macroeconomic conditions on the fiscal year's operating performance was revised. Ongoing expenses are forecast to remain at approximately third quarter levels.

Research and Development costs were $7.2 million for the quarter. During the quarter, we also recorded through core operating income a charge associated with Visteon's bankruptcy filing. Discussions with Visteon are ongoing, so I should note that we are unable to answer questions relating to our relationship and ongoing discussions at this time. Stock based compensation was $13 million in the quarter. Net interest expense for the quarter was $19 million, consistent with the previous quarter. The tax rate on net core operating income in the quarter was 20%. I'll now turn the call over to Forbes Alexander.

Thank you Beth. Good evening. I'd now like to ask you to turn to slides six, seven and eight, to review the balance sheet and some of our ratios. The Company's sales cycle in the quarter increased by two days, to 22 days. Days sales outstanding increased by 4 days, to 40 days. As a result, of $114 million less receivables, (inaudible) off balance sheet accounts receivable securitization program. Accounts payable days improved by two days to 64. Inventory balances declined by $146 million, while days in inventory were consistent with the prior quarter at 46 days. Inventory turns remain at eight.

Cash flow generated from operations was $78 million in the third fiscal quarter. This after a decrease in our AR securitization usage of $94 million. Year-to-date, we have generated $387 million from operations. The return on invested capital in the quarter was 6%. Cash and cash equivalents were consistent with the previous quarter with cash balances being $769 million. After reducing debt and AR securitization levels by $136 million during the quarter. Both sums were outstanding on our $800 million revolving credit facility. Our capital expenditures during the quarter were approximately $50 million. This level of expenditure primarily reflects continued investment in our IT infrastructure and maintenance capital investment. Depreciation for the quarter was approximately $65 million. And core EBITDA was approximately $94 million, or 3.6% of revenue.

We remain pleased with the manner in which we executed to our quarter's working capital and operational plans. In a difficult economic and end market environment, we continue to manage working capital levels. We are pleased to have generated $387 million of cash flow from operations in the year-to-date. While cash balances have remained consistent with those beginning -- with those of the beginning of year balances of $770 million, while at the same time, reducing our debt levels by $278 million. We are continuing -- with our continued focus on working capital management, we have the opportunity to generate $500 million of cash flow from operations in this full fiscal year.

I'd now like to give you a quick update on our restructuring activity. During the third fiscal quarter, we recorded charges of $16 million associated with our previously announced plan. While cash payments associated with these plans were $10 million in the quarter. Through the third fiscal quarter, we have recorded charges of approximately $49 million, cash payments associated with this plan of $17 million. Discussions with our employees, and the representatives continue and we're complying with all statutory and consultation periods required of us. As a result, we currently estimate charges of $7 million in cash payments totaling approximately $15 million will occur in the fourth fiscal quarter.

In summary, we are pleased with the way in which we executed in our quarter. However, I would like to take a moment to talk about our year-over-year operating margin decline, 2.8% to 1.1%. While revenues have fallen 15% or some $500 million over the same time period. As I believe it is important to understand the various elements of this margin decline. How these will translate to operating income margin expansion when we see a return to revenue growth. Of the 1.7% decline, 50 basis points are attributable to our SG&A cost base. The balance attributable to the distress in automotive customer charge, changes in foreign exchange, and most importantly, fixed cost absorption.

An important point here is that the value add portion of our revenue stream has been relatively consistent throughout this period, reflective of a rational pricing environment. SG&A expenses have been relatively fixed over the last year, and I would expect this to be the case as we see revenues recover. Along with the absorption of fixed manufacturing costs such as buildings, depreciation, information technology infrastructure, engineering and procurement activities, and the reduction in our overall cost base of $55 million annually, occurring as a result of our restructuring activities. In summary, we are well-positioned as we see revenue growth to deliver rapid margin expansion in a range of $0.10 to $0.15 per dollar of revenue growth.

With that, I'd now ask you to turn to slide nine, and give you a business update and fourth quarter guidance. While we remain in a difficult and somewhat uncertain broad-based macroeconomic environment, we are seeing stabilization across all the sectors we serve. As a result, we shall not be providing specific sector guidance for the fourth quarter. Overall Company guidance for the fourth fiscal quarter is as follows. Revenue is estimated to be consistent with that of the third fiscal quarter, in a range of $2.5 billion to $2.7 billion. Core operating income is estimated to be $25 million to $50 million, reflecting ongoing benefits of our restructuring and cost containment initiatives. As a result, core earnings per share are expected to be in the range of $0.02 to income of $0.12 per diluted share.

Selling, general and administrative expenses are estimated to be consistent with $112 million. Research and Development costs are expected to be $7 million. Intangible amortization, also expected to be approximately $7 million. Stock-based compensation is estimated to be $13 million in the fourth quarter. Interest expense is estimated to be consistent with the third quarter of $19 million. And we expect, based upon current estimates of production and income levels, tax rate on core operating income to be 20% for the quarter. Finally, capital expenditures for the fourth quarter are estimated to be somewhat consistent with those of the third quarter, reflective of ongoing IT infrastructure refreshes, and maintenance capital expenditure levels. With that, I'd now like to hand the call over to Tim Main.

Thank you, Forbes. Fiscal Q3 turned out as expected, demand continued to decline with uneven performance across most of our sectors. Some were a bit weaker than expected while others, such as our industrial instrumentation, medical, and our AMS division performed well in spite of the circumstances. The six month period from mid-October to April has been one of the most turbulent and difficult in our corporate experience. Excluding new business, revenues declined over 30% from fiscal Q1 to fiscal Q3. For Jabil, this was a higher level of decline than experienced in the dot-com implosion, and in a shorter period of time. And in addition to seeking new opportunities for growth in existing and adjacent markets, we focused on cash generation and cost control, while preserving our ability to grow again, and to invest in our core business.

While we should, will always effort to do better, we have produced $387 million year-to-date cash flow from operations, and have converted $356 million of inventory to receivables or cash since the end of our first quarter. Our liquidity and ability to grow are in excellent condition. Late in our February quarter, and into the middle part of our May quarter, business continued to decline albeit at a slower rate. More recently, we began to see genuine stabilization across most of our industry sectors, giving us higher confidence in guiding the consistent revenue levels for our August first quarter. The cost reductions we've been driving, as well as the ramp of new business in targeted markets will drive better earnings on similar revenue levels. Now return to the future earnings power of the Company and we have a very high confidence in our ability to quickly expand margins and income with revenue growth. Although mix will play a role, as well as the timing and strength of a recovery, our operating leverage will be significant as we grow revenues back to the $3 billion per quarter level and above. With our market share and new business activity and a positive position, we look forward to growing our business again in a somewhat more receptive business environment.

Operator, we are ready to take questions-and-answers now, please.

(Operator Instructions). Your first question comes from the line of Amit Daryanani with RBC Capital Markets.

Thanks a lot. Good evening, guys. I guess Forbes, just a question. You talked about $0.10 to $0.15 of every incremental dollar revenue flowing through the operating income line. If I kind of do my math, looks like on a $3 billion revenue run rate, you should be able to hit something around a 3% EBIT margin. Would that be the correct way to think about it in the long run as demand starts to come back?

Absolutely, Amit. Yes, very much depending on the mix, but for that type of range, if you look at the mid point of the range to the guidance that we've given to the upcoming fourth fiscal quarter, that incremental revenue certainly gets it to that 3%, relatively comfortably. So yes, we feel pretty good about that. The leverage that we have here, we've seen some of that on the way down, with my prepared remarks. As we've seen on a year-over-year basis, half a billion dollars of revenue come out the top line, and we'll certainly see that recovery on the way back. And we continue to take costs out, and we're in really good shape for revenue recovery.

Got it. And then just broadly speaking, I realize you don't want to get into details on each of the end markets in terms of guidance, but this generally would be a time we should start to see some of the consumer centric markets start to see some uptick in seasonality. Are you guys seeing that at all? Is that getting offset by slide or softness in the enterprise and networking side?

We generally would not see a big uptick in the August quarter. Historically, Amit, this has been -- this is kind of a challenging quarter. Consumer is really transitioning products into new products for the Christmas selling season. And enterprise markets tend to be pretty sleepy. So this is a quarter where historically we've been happy to have consistent revenue and earnings historically. We are starting to see enterprise spending in some of the US markets pick up a bit. That's been -- that's been good to see.

And on the consumer side, more and more stabilization, and we have decent exposure in the smart phone market now. And that's held in pretty well. And we think we'll be pretty robust as we move into the Christmas season. So I don't think there's anything out of -- anonomalous -- about the quarter in terms of certain sectors being more robust or weaker than others. It's a pretty spotty -- it's a pretty spotty period. We're definitely not leading into a recovery with this guidance. We're leaning into a bottoming of the market. There are some -- a few green shoots out there, but they could be mowed under and muddied up pretty quickly. So really we are not leaning into a robust recovery. We're really kind of planning on a bottoming which is what we see in terms of our market sectors overall.

Got it. That's it for me. Thanks, guys.

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

Thanks. Good afternoon. Tim, two questions. First of all, can you talk -- you mentioned that you felt positive about new business opportunities. Can you sort of talk about the status of those, and where you see the most opportunity near term? Or is it too soon to start thinking about new program wins? And then secondly, just details on the 10% customers, if you don't mind.

Yes, the first one is pretty easy. We're not going to provide the 10% customer detail at this point. I think we'll probably do that after the year-end, maybe. Our customer concentration's actually been in pretty decent shape this year, under 60% for the first time. Most of the year -- it's first time in my memory that we've been able to have that level of diversity in the top end of our customer range. In terms of new business, when we look at the industrial instrumentation, medical sector, that sector I think was down only 5% for the quarter. And that's indicative of a number of new business wins, and some strengths in the smart grid, clean tech area that is starting to blossom for us. We have some long-standing businesses in things like alternative energy with wind power and that type of thing. But we're also building more products for smart grid applications in the power grid. So that's been good as well as new business wins in medical, and we're starting to see some glimmers of hope in our semicon business as well. So we're pleased to see that.

In the mobility area, the reason our revenue's only down 15% year-over-year is really the strength of new business wins in that area, which have been very significant. And although our mobility sector was down sequentially a bit, we still expect that to be a very robust sector for us going forward. We'll see some broad-based new business wins elsewhere. It's not a heck of a lot to hang your hat on right now, just because overall demand has been so weak, that it has really swamped the benefit of new business. And I think we'll be in a position to talk more about that when we get into Q1 and Q2, and maybe we start to see a little bit more robust economic environment, we can talk about what -- which sectors we think will be really driving the growth going forward.

Okay. Thank you very much.

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

Hi, thank you. I guess if I could maybe look at the segments that overall you're guiding overall revenue to be flat sequentially. Would you expect for the segments, would you expect them to -- within each segment -- experience typical seasonality that they've seen historically? I mean, you did comment that the industrial is probably a bit healthier, and I don't know if that continues into the fourth quarter, and maybe mobility is a bit healthier, but maybe just trying to gauge it versus what we've seen historically by segment.

Sherri, it's Forbes. Yes. They're all relatively -- looking relatively stable. Automotive will have its typical summer seasonality which is roughly down 10%, but it's becoming a less significant portion of our business, 2 or 3%, as we look forward here. So not really meaningful in terms of seasonality. But otherwise, as we've been saying, we're seeing some stabilization across most of these sectors. And on a relative basis, everything's looking relatively flat within a percent or two. There's no real wide variation.

Okay. So everything more likely to be relatively flat sequentially, with not a lot of variation, is that fair to say?

That's fair to say, with the visibility we have right now, automotive should see some seasonality, and again, not material to our overall business.

Okay. And then Forbes, on the balance sheet, you guys have made some good progress in reducing the inventory levels, and generating some cash. It seems like at least you've probably stabilized, my guess would be that you've stabilized at these levels, and it's going to be harder to get additional -- do more additional cap -- make additional progress on your working capital. Is that fair to say, or do you think you can take some additional inventory and accounts receivable down, considering the revenue's going to be flat, or what are your expectation there?

Yes, I think certainly on the payables and the receivables, they're relatively flat. That's really now around the mix of the revenue stream and the materials stream, and with expectations that that mix of business is pretty consistent. I think, expect similar results for Q4. In terms of inventory, we've got some very focused efforts going on there. And as you say, we've made some decent progress in dollar terms and (inaudible). And days, 46. But I certainly, even with flat revenue levels, I think we have an opportunity to perhaps seek another day or two out, which is $25 million, $50 million.

Some of that will be predicated upon how we see Q1, our fiscal Q1 looking, which is too early to talk about that yet. But historically you'll recall that that is our big seasonal quarter with our consumer exposure. So a lot very much there depends upon the ramp of that quarter. In other words, are we going to start to see a consumer build in the month of September, or are we going to see a later consumer build this particular year in this recession until October, November time frame. Really, if we see that build, indicated from our customer base September, we'll need to preposition some inventory towards the end of August, early September. It's a little bit early to call yet, but certainly I think there's opportunity for a day or two.

Okay. That's great. Thank you very much.

You're welcome.

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

Hi. A follow-up to an earlier question on just new business wins. Maybe if you could comment on what you're seeing on the outsourcing environment, whether you're seeing potential larger programs coming to market, OEMs starting to look a little bit more at changing their model from a fixed cost to a vertical cost structure?

Yes, without speaking about any large opportunities that may be out there, we absolutely expect to see a replay, long-term of the move to outsourcing following a recessionary environment, similar to what we saw in the 2000, 2001 time frame. That prompted a period of growth for the industry, and for our Company that was really, really very, very strong. Our revenue grew about $7 billion, $8 billion over a four-year period following the last recession, so we think we'll see that again.

There will be -- you guys will absolutely pick up on new bits of some vertical OEMs flowing business back inside, potentially building a new factory, that's also a normal behavior in the middle of a recession when they're really struggling to fill their own assets. I think the longer term response to that ability to manage their fixed cost, manage their manufacturing base will be to continue to outsource. I like our position, given kind of the broad, diversified exposure we have to a wide range of industry sectors, and our ability to capitalize on those opportunities as they come up.

But -- I'm sorry, your sense is right now -- at least my sense is it doesn't seem like it's changed right now, it's -- maybe as we look out a few quarters you would see that acceleration, but right now it's pretty much the same as if we were looking back six months, 12 months?

Not sure how to gauge that for you. There are a number of opportunities out there. And my sense is that vertical OEMs will continue to outsource more. When exactly they'll show up into the revenue stream -- unclear to me. Our industry overall continues to grow the significantly. And although 2009 will be an anonomalous year in that growth, because of the recession, it will certainly outpace the growth of the overall electronic market. And I think when we look in 2010 and 2011, -- very strong signs that the industry will grow robustly again.

Okay. And then a follow-up question on the restructuring program. Given the cash charges taken to date, my math suggests maybe there's initial, say, $45 million to $50 million of annualized savings here to come over, say, the next four to six quarters. Is that a proper estimate?

For the next four to six, yes. When we announced the restructuring we talked about $55 million on an annualized basis, so yes, I think mental math, I think you're about right there, yes.

Okay. Thanks a lot.

Okay.

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

Great. Thanks. Tim and Forbes, can you maybe help us better understand a little bit about the solar revenue opportunity, kind of when should we start to see these revenues come in? I assume it's probably calendar, early part of calendar next year. Or and also how big of a revenue opportunity it is, the margins associated with it, and what type of capital commitments did you have for this, because we're really not used to hearing much about the solar industry going to EMS but it seems like its the trend that's probably actually going to accelerate.

Yes. I think it's a great long-term opportunity for us and I wouldn't look at it as being a wide, wide departure from what our core business is. Power generation panels, they're electronic in nature. They use our present factories, some of the process technology's a bit different. Some of the machinery equipment is a bit different. But the level of capital expenditure, for instance, relative to revenue, is similar to what we would find in printed circuit board assembly. So certainly not distortive from a fixed asset investment, or capital exposure. So we will defer much commentary on specifically the solar area until later quarters, as we kind of ramp into production and ensure the relationships that we've developed in that area.

Having said that, I think we're very excited about our presence in a wide range of clean tech industries, which are -- some of which are currently embedded in our industrial instrumentation medical segment We talked about smart grid products, wind generation products, and adding this exciting opportunity in alternative power generation, in solar technology is really a part of a more broad-based effort to connect the Company, and connect our business to what we think will be a sustained, long-term, robust growth in an area that will definitely employ our strong skill sets and global supply chain manufacturing and supply chain management. So I think again, long-term, getting out of what's going to happen over the next quarter or two, looking over the next two or three years, we're very excited about our presence in that whole area.

And then as a quick follow-up, on the After Market Services, does that market tend to typically do a little bit better during a recession, as people maybe try to upgrade their servers, rather than replace you new servers? Or is your After Market Services just growing that much faster, and should we look at it to continue to grow as a piece of the pie that you have.

Yes, we've got some interesting debates with our folks that run our After Market Services areas, and what the recession actually means. I mean it's true that people will repair products more often in a recessionary environment than buy new ones. On the other hand, there's so much less new product flowing into the environment. People are buying 30% less products. Eventually I think that would catch up to you. So,we're not sure. In the short-term, I think it's probably good, and I will say that our AMS division is doing an outstanding job in securing new programs and expanding their presence. So they are legitimately apples-to-apples growing their business significantly, and doing a great job of running it.

Thank you very much, gentlemen.

Thanks,.

(Operator Instructions). Your next question comes from the line of William Stein with Credit Suisse.

Thanks. Wondering if you could talk a bit about the plastics business at Greenpoint. I know traditionally there's a lot more operating leverage potentially in that business. Could you tell us, maybe give us an update as to how sales are tracking there. relative to the rest of the Company?

Well, they experienced a significant reduction in revenue, after fiscal Q1 of '09. So Q2 and Q3 were very low quarters and we experienced significant deleveraging of our profitability there. And having said that, they've done an outstanding job of managing cost, but also of penetrating new opportunities to grow their business, particularly in the smart phone area. I think when we look at fiscal 2010 and a number of new programs that are ramping, as we speak and into fiscal Q1 of 2010, we expect to enjoy positive operating leverage with our plastics vertical business. You're right in that, the value add associated with that business is about twice the value add that we have in our EMS, traditional EMS business. And that means that the fixed cost as a percentage of that value added manufacturing cost is much higher than our legacy business.

So there's a stronger operating leverage going both ways. They've had a couple of rough quarters in Q2 and Q3, beginning to see some significant recovery in Q4. And into Q1 we think that business will continue to be in good shape. It's our technology and know-how in that area is contributing significantly to our ability to grow the mobility space. And so I'd say legitimately, genuinely, that it's a key part of our value proposition and value stream that we offer to, particularly to higher end customers in that space.

Maybe shifting to the telecom segment, you did the Nokia-Siemens networks deal a few quarters, and now they're buying part of Nortel's assets, I think it's another customer that you were ramping prior to their bankruptcy. Can you comment as to how that relationship is progressing relative to this announcement we saw earlier in the week?

Well, we're trying to do business with everybody that we think is going to be strong and survive and establish a presence in the technology, the products that we think will be important to those companies longer term. I can't comment on the NSN, Nortel acquisition or what that will mean to us. Truthfully we've been positive about the relationship with Nortel, but given the circumstances there, it would be inappropriate for us to comment much on that. And in truth, to date, it's not been very material to our results.

And one real quick one, if I can. We have a write-down from Visteon this quarter, not too surprising. Do you think there's anything else that could be coming along the lines of credit problems with customers? Or do you think we're behind that now?

Hi, it's Forbes. No, I think we're in pretty good shape. We have a pretty robust process. Clearly, there was always some risk around the automotive space here over the last 12, 18 months as credit markets declined and overall economic recession. Otherwise, we are in pretty good shape with the balance of our customers. We feel good that we shouldn't see any future events.

What we have left in the automotive space is, actually pretty good companies, well-capitalized, not any credit risk, so --

Thank you very much.

Okay, your welcome.

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

Hi, good afternoon. I wanted to ask you about the guidance for the fourth quarter. It seems like a very wide range. I got on late, so you might have covered this during your presentation, but what explains that wide range and what does it depend on?

I think it's the same range that we provided in Q3.

I'm talking EPS now, is what I'm talking.

EPS should be very similar as well. We had a $40 million spread in core operating income in Q3, expect to have a $25 million spread in Q4. That's actually tightened up a little bit. We've taken money, we've increased the (inaudible) side of our guidance from zero to $25 million in core operating income, and raised the high end to 40 to 50. And in terms of very specific on the EPS range, we've --

$0.02 to $0.12 -- 25, the low end of the range.

$0.10 versus $0.16 last time, right? Because minus 8 plus --.

We tightened the range on it.

Wide range? Who knows? We believe the bottom of the economy, we believe we'll see genuine stabilization of the revenue levels. Believe that we've got the right products, the right customers. We think we're going to do significantly better before than we did in Q3, in terms of earnings. But this economy's a long, long way from being in a healthy mode where you can determine directions. So I think it's pretty prudent for us to remind investors that we're wary of the actual activity of sell-through to customers. And we need to give ourselves a range, and remind investors through that guidance, that given the economic environment, earnings are far from a certainty.

Okay. Second question is you mentioned earlier the possibility that some manufacturers initially might decide to move some things in-house. Do you have any examples of that in your business?

I think the one that's been well-publicized with the Nokia announcement three, four months ago --

Right.

Other than that, we don't have any significant customer accounts, associated with that type of move.

Because recently, NCR announced that they would in-source some ATM manufacturing. And as I can determine, the reason they're doing that is they can get some tax incentives from the state of Georgia that requires a certain number of jobs to be created within the state of Georgia. And it really has nothing to do with the economics actually of in-sourcing, but there was some comment accompanying that in some of the local press that oh, there's a trend toward in-sourcing. But from what you can tell, is there any such thing?

I don't think there's any such thing. I might have mentioned NCR. But I'm glad you brought it up. I forgot that it was a public statement that they made. These OEMs will have certain drivers, different personalities, and opportunities like NCR has to receive significant tax benefits for an activity, maybe they think can be supported domestically within their own sites. To take a couple of data points in a $1 trillion industry, and say that's a trend, I don't think so.

Yes, well, it was a bill in the state of Georgia that if you can create 1800 jobs or more, you can get some tax incentives. Well, the only way they could do that was to in-source this ATM manufacturing because they didn't have enough people coming from Dayton to meet the 1800 bogie. This is not the way the press presented it, but it's obviously the case. So it had really nothing to do with lowering costs or anything like that.

Right. Well, the politics that we're in today are going to really be very negative towards outsourcing, and that type of thing. Let's just accept that, but recognize that the trend to outsource and the cost benefit of outsourcing are so compelling, that these temporary political statements I think will in fact be temporary, and the broader economic force of what compels OEMs to do what they do, will prevail.

Well, you're absolutely right. CEO of NCR bragged that oh, we're bringing jobs back from overseas when in reality they're coming from South Carolina.

(LAUGHTER).

Okay. Thank you.

Your next question comes from the line of Shawn Hannon with Needham & Company.

Yes, thank you. So you had commented a little bit earlier, sounds like we're seeing a little bit of stability here. And that's kind of continued on from the last call and Tim, I think you made a comment earlier, sounds like enterprise is picking up a little bit. So without assuming guidance, and just in talking around your business and mix, when we eventually get to a recovery point, what in your mind is going to show some of the stronger recovery signs, excluding some of these newer markets such as smart grid where this is really kind of new business to the industry, but as you look at your traditional business, where do you expect to see some of those stronger recovery points?

Well, I mean, this may sound disingenuous, but IT enterprise spending and Consumer Electronics I think will be very robust. There's been underinvestment. There's been underinvestment in IT. There's been underinvestment in data centers and computing. Consumers have been on the sidelines. When we look at parts of our Consumer Electronics business year-to-year, unit volumes are down 40% to 45%. I mean, it's a huge drop in sell-through rates. So consumers come off the sideline and start to buy again, I think we'll see a significant upticks in printing, in mobility, and in some of the other set-top boxes, and some of the other areas that we support. The sectors like telecommunications and our industrial instrumentation, medical segments that have performed relatively well short-term, probably won't be as robust on the upside. But when we look at enterprise IT spending, I think we should see significant growth there.

There is some OEMs that have started to plant some of the seeds with the investor community around the opportunity that might come with the next Windows release, and didn't know if there was anything from your perspective, commentary on drivers around that, and how you expect that could translate within your own business.

Yes, we don't have much of a PC, or even an industry standard server business. Our computing and storage sector is, gosh, must be 80%, 90% now high end enterprise storage, along with some lower end, mid-range products, but dominated by high end enterprise storage products, networking sector is enterprise IT, there's some consumer level products in there, but we don't -- I'm really referencing sectors that we play in today. We really don't play in the industry standard server, or PC notebook market.

Well, that's helpful around the servers. And then lastly, on the industrial side, so when you talked about some of these -- the newer programs that you're having a little bit of benefit from, that are relevant to the smart grid, you have some partnerships with some meter companies, solar companies. Obviously, this is still a pretty small space in general for you today, but is there a particular group within those cleaner technologies that's much more meaningful versus another? Or are they around similar levels?

Well, if we consider our participation in smart grid, smart electronics, power reduction efficiency, lighting, as well as things like solar, and group that into a business activity which is directed towards power and energy efficiency and alternative power generation, it's actually already a pretty decent business for us. And I think that solar will be just a part of what we have in that total business activity. And I expect it to be -- I expect it to increase in importance over the next few years. It's really a long-term play for us, not a -- not anything that will make a difference in how we perform in Q4. Probably how we'll perform in Q1. It's a farther out prospect, although we do have new relationships in that space. And we will be ramping those relationships through 2009. And our historical behavior and protocol on that type of thing is to talk about those customers or activities when they become meaningful to our results, and that's still a few quarters off in the distance. So I think we'll provide more detail and more information on what's happening there, as we get closer to the advent of material revenue and meaningfulness to our business.

That's helpful. And sorry, one quick follow-up, if I could. In terms of the guidance, if we were to extend the current environment from August, and I know we're not giving some commentary around obviously the November quarter. But if we were to assume generally similar levels, should the restructuring benefits that we're seeing, that's basically embedded in your guidance for August, kind of around 30 basis points, should we see something similar to that transpire?

That's reasonable. Your question is if revenue levels were consistent?

That's correct.

For Q1. Yes, that's reasonable. We've got ongoing restructuring activity. We expect about $15 million of cash expended associated with that Q4. So yes.

That's great. Thank you.

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

Good afternoon. Just going back to the comment that you expect to see the $0.15 of each incremental revenue dollar drop to the operating line, what are the key assumptions embedded in that expectation as you think about mix shifts, utilization levels, et cetera? And what segments are most responsible for driving that? I'm just trying to understand what would have to happen for that leverage to not materialize on the revenue, where the revenue would actually get to that level?

Let's be clear on -- there was a range. It was $0.10 to $0.15.

$0.10 to $0.15.

So, in that range there's assumptions about mix. A more materially intensive revenue stream that we might find in low end Consumer Electronics, or highly commoditized activities like high volume printed circuit board assembly will produce fewer operating income dollars per incremental dollar revenue. If we were to see that revenue increase -- slanted more towards our vertical integration activities, our higher margin sectors, then we'll be at the high end of that range, maybe a little bit better. So there's a mix. So if you were to take that midpoint, same, same, Company grew all sectors, same rate, at the same time, we expect to see $0.12, $0.13, $0.14 of operating leverage depending on how we do. What do we need to assume? We need to assume that the Company manages what it can manage, which are things like SG&A expense, that we absorb the fixed costs that we have in place today. And that that pricing doesn't collapse.

And I think that's one of the reasons that Forbes discussed our value add to the revenue stream today, versus a year ago. Because I think it's very important to note that the value add in our revenue stream today, is within a half a percentage point of where it was year ago. Which is why it's very confusing to talk to investors about what the pricing environment is like, because they barely -- a fairly good proxy for what's happening in terms of value add and pricing and the overall business. So we don't think that price will be necessary to drive additional revenue, or a significant determinant of how we're able to grow revenue. So what would it take for that not to happen? I'm not sure. It would have to be something which would be outside of our control.

I think the only thing that really keeps that from happening is the revenue doesn't grow. We simply can't seem to move from $2.6 billion a quarter, back to $3 billion. I don't think -- I don't know if that will happen in Q1 or later. That depends on the overall economic environment, and how we continue to do in terms of new business awards. I can tell you from the management team's standpoint, we have very, very high levels of confidence that in a stable economic environment, really a GDP growth of 1% to 2% a year will give us a platform that we'll be able to grow the business significantly year-over-year. There is new outsourcing, because there is new business awards, because we are gaining market share.

I guess I was thinking back to the mobility segment, where the leverage didn't materialize because you had to end up adding capacity where you thought you would be able to utilize existing. And I wasn't sure if that was a risk.

That operating leverage actually occurred. It didn't occur at the high rate that we thought it would.

Okay.

So we've given ourselves maybe a little bit more conservative range in terms of that operating leverage than we gave ourselves a couple of years ago. And but in truth, I mean, even though the operating leverage was a little less than we expected on the mobility ramp a year ago, still there.

Great. Thanks.

Okay.

At this time, there are no further questions.

Great. Thank you, very much, for joining us on the call today and appreciate your time. Thank you.

This does conclude today's conference. You may now disconnect.