捷普科技 (JBL) 2010 Q2 法說會逐字稿

Good afternoon.

My name is Stephanie and I will be your conference operator today.

At this time, I would like to welcome everyone to the Jabil second quarter earnings conference call.

All lines have been placed on mute to prevent any background noise.

After the speakers' remarks there will be a question-and-answer session.

(Operator Instructions) Thank you.

I would now like to turn the conference over to Beth Walters.

Please go ahead.

Thank you.

Welcome to our second quarter of 2010 fiscal year call.

Joining me on the call today are President and CEO, Tim Main and our Chief Financial Officer, Forbes Alexander.

This call is being recorded and will be posted for audio playback on the Jabil website in the investor section along with today's press release and the slide show presentation on the quarter.

You can follow the 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 third quarter of fiscal 2010 net revenue and earnings results, our long term outlook for our Company and improvements in our operational efficiency and our financial performance.

These statements are based on current expectations, forecasts and assumptions involving risks and uncertainties that could cause actual outcomes and results to differ materially.

An extensive list of these risks and uncertainties are identified in our annual report on Form 10-K for the fiscal year ended August 31, 2009.

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 statement whether as a result of new information, future events or otherwise.

Please turn now to slides two and three.

Results for the second quarter of fiscal year 2010, on revenues of $3 billion GAAP operating income was $68 -- excuse me, $61.8 million.

This compares to $706 million GAAP operating loss on revenues of $2.9 billion for the same period in the prior year.

For operating income, excluding amortization of intangibles, stock-based compensation and restructuring charges for the quarter was $95.6 million or 3.2% of revenue.

As compared to $51.2 million or 1.8% for the same period in the prior year.

Core earnings per diluted share were $0.29 as compared to $0.13 for the same period in the prior year.

On a year-over-year basis for the quarter, revenue increased 4% while core operating profits increased 87%.

On a sequential basis, revenues decreased by 3% while core operating income decreased 9% reflecting the seasonal nature of our consumer division.

Of note, this was the lowest second quarter decline in revenue and core operating income since fiscal 2004.

Please turn now to slides four and five for discussion of revenue by division and sector for the second fiscal quarter.

Starting with the EMS division represented approximately 61% or $1.84 billion sequential growth of 10% as compared to the first quarter of fiscal 2010.

Core operating income for the division was 4.2% of revenue.

The sequential sector movements are as follows.

Computing and storage increased 15% from the first quarter representing 11% of revenue.

Industrial, instrumentation and medical sector increased 14% from the prior quarter as a result of growth across a broad number of customers.

This sector represented 23% of revenue.

Networking sector levels of production increased by 18% from the previous quarter.

This sector represented 18% of revenue in the quarter.

Telecommunications sector decreased 6% sequentially and represented 5% of the second quarter's revenue.

Turning to the consumer division, this division represented approximately 32% or $970 million in the second fiscal quarter, a sequential decrease of 21% again reflecting the seasonal nature of this division.

Core operating income for the division in the quarter was 0% of revenue.

Digital home office sector decreased by 7% from the first quarter and represented 15% of revenue.

The mobility sector decreased 30% from the prior quarter reflecting a seasonal nature of these products and represented 17% of revenue in the quarter.

Turning to the aftermarket services division, it decreased by 2% from the prior quarter to $196 million and represented approximately 6% of overall Company revenue in the second fiscal quarter.

Core operating income for the division in the quarter was 10% of revenue.

In the second quarter, two customers accounted for more than 10% of revenue and our top 10 customers in the quarter accounted for approximately 58% of revenue.

Selling, general and administrative expenses increased by approximately $2 million to $119.8 million.

Research and development costs were $7.4 million in the quarter.

Intangibles, amortization was $6.6 million.

Stock-based compensation was $26.5 million in the quarter.

The increase was primarily related to performance based equity awards which were previously deemed unlikely to vest in fiscal 2009, but based on current expectations are now expected to meet the requirements for at least a portion of the awards to debt.

Net interest expense for the quarter was $21 million.

The tax rate on net core operating income in the quarter was 16%.

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

Thank you, Beth.

Good afternoon.

I'd like to ask you to turn to slide six through eight and I'll give you some commentary on our balance sheet.

Our sales cycle in the second quarter expanded by one day in the first quarter to 17 days, an increase in days in inventory of five days was offset by an improvement in days sales outstanding for five days while payables days contracted by one day.

While our inventory days expanded reflected of the constrained materials environment, we remain very pleased with the overall levels of working capital performance.

We continue to generate cash flow from operations reducing $31 million in the fiscal quarter.

A return on invested capital was 18% for the quarter.

Our cash and cash equivalents were $794 million at the end of the second quarter.

No sums outstanding on our $800 million revolving credit facility.

Our capital expenditures during the quarter were approximately $78 million.

Depreciation for the quarter is approximately $63 million with core EBITA in the quarter being approximately $159 million or 5.3% of revenue.

Cash payments associated with the restructuring plan we announced in fiscal 2009 were approximately $16 million.

The majority of payments associated with this plan are now complete.

We're also pleased to note that we have recently renewed our accounts receivable securitization facilities with a total availability under these facilities of $300 million.

In summary, we're pleased with the quarter's results, a quarter where our revenue and income streams are typically sequentially down due to seasonal slowdown in consumer spending.

We're encouraged that in a constrained materials environment in which we're operating such sequential declines is at its lowest level since fiscal 2004.

Working capital management remains well under control.

Cash flow from operations continues to be positive.

On a year-over-year basis, the first half of fiscal 2010 has seen us produce $50 million more in core operating income on $177 million less in revenues.

Reflective of our continued focus in turning the Company to produce a long term targeted return levels.

Now I ask you to turn to slide nine.

I'll discuss our third quarter of fiscal '10 guidance.

Our overall guidance for the third fiscal quarter is as follows.

Revenue in the quarter is estimated to grow sequentially in a range of 3% to 10% on a range of $3.1 billion to $3.3 billion.

The EMS division is expected to grow 8% sequentially while the consumer division is expected to grow 5%.

The EMS division is expected to have consistent revenues with those of the second quarter.

Core operating income is estimated to be in a range of $100 million to $120 million.

Our guidance reflects approximately $5 million of costs associated with our investments and new program ramp activity associated with the expansion of process technology capabilities within our Jabil Green Point mechanical operations.

I'd also like to point out that the midpoint of our guidance reflects revenue growth at approximately $600 million or 22% on a year-over-year basis while core operating income growth of $80 million represents an 81% growth on a year-over-year basis.

A year ago, we discussed that we would expect income leverage for $0.10 to $0.15 per incremental revenue $1 from our low revenue point of $2.6 billion a quarter.

At its midpoint, our guidance reflects a cumulative income leverage of $0.14 per revenue $1.

As a result, core operating income margin is expected to be in the range of 3.2% to 3.6% and core earnings per share are expected to be in the range of $0.30 to $0.36 per diluted share.

Our selling, general and administrative expenses are estimated to be consistent at $120 million.

Research and development costs are expected to be approximately $8 million in the third fiscal quarter while intangibles, amortization is expected to be approximately $7 million.

Stock-based compensation expense is estimated to be in the range of $15 million to $26 million in the third quarter depending on Company performance in the second half of our fiscal year.

Interest expense is estimated to be consistent with that of the second quarter, at $21 million, and based upon the current estimates of production and income levels, our tax rate on core operating income is expected to be 20%.

Finally, turning to capital expenditures, we plan to invest an incremental $70 million which totals $150 million of expenditure in our third quarter.

This incremental sum is principally to fund new process technology, mechanical capabilities to support numerous exciting program wins within our Jabil Green Point mechanical operations.

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

Thank you, Forbes.

The second fiscal quarter started with a great deal of uncertainty but ultimately provided some positive indicators for the course of our business.

First of all, year-over-year margin expansion was 180 basis points on the gross margin line and 170 basis points at the core operating margin line, this on a relatively modest 4% increase in revenue.

We also have two consecutive quarters with gross margins above 7% and core operating income margins above 3%.

I believe our focus on efficient operations, realized savings from previous rationalization plans are delivering the expected improvement in our profitability, even more apparent now that we are growing revenue at the same time.

Secondly, the second quarter was the lowest level of seasonality we have seen since fiscal 2004.

Indicating we are doing a reasonable job of expanding our business in targeted markets as the macroeconomic environment shows some sustained improvement.

The industrial, instrumentation medical sector was up 14% sequentially, an increase to 24% of our revenue in the second quarter.

Indicating we are successfully developing our value proposition for important customer relationships in this sector.

Business in our enterprise sectors was also strong in the quarter indicating some tailwind to demand.

The consumer facing parts of our business were down sequentially, a bit more mobility than expected but our digital and home office sector which covers displays, printing and set-top box businesses was only down 7% sequentially, lower than historical averages.

On balance by consumer spending has not rebounded with the strength we've seen in other areas there are positive signs of stability and even some growth in certain areas.

I think it's interesting that business spending appears to be leading in recovery.

Businesses really clamped down on IT spending during the two year recession, so we're seeing some investment to satisfy that pent up demand.

All companies are focused on productivity and reducing variable expenses such as travel.

And investment in a strong IT infrastructure and in products such as video conferencing really helps companies improve their productivity and reduce costs.

And there are some secular trends which favor a high speed advanced communications infrastructure.

Video content over the Internet and the telecommunications infrastructure is increasing at double-digit rates.

Data storage and management is becoming an enormous and complex task for companies all over the world.

So some good reasons we're seeing what we are in enterprise spending.

With all these positive indicators in mind, we continue to be conservative in our guidance.

If we simply earn in the second half of the fiscal year what we earned in the first half, fiscal 2010 will be a record year for Jabil by a wide margin.

Continuity of component supply continues to be an issue we grapple with and I don't expect a great deal of improvement in the near term.

And we would like to see consumer spending rebound and be sustained for several quarters before we become more aggressive in our guidance.

But for the balance of the year, we'll be focusing on customer service, improving our capabilities, reducing our cost structure and expanding in targeted markets.

We feel good about our opportunities to successfully execute on these initiatives and deliver a good year for stakeholders in Jabil.

Operator, we're ready to begin the question and answer portion of the call.

(Operator Instructions) Your first question come from the line of Steven Fox with CLSA.

Hi.

Good afternoon.

Can you hear me?

Yes.

Tim, can you just talk a little bit more about the investment going into Green Point.

How much is it sort of next generation type of mechanicals and anything you can expand on there in terms of the products it's going to drive?

Well, there are as Forbes indicated some new program wins and some new process technology and because of the sensitivity around that, we really can't say much more about it at this point.

Hopefully as the time goes on and we get a little bit more traction there we'll be able to provide more information, but for now we really need to be pretty cursory in what we can say there.

Can you talk about the timing of when the investments turn into programs at all?

It's basically contemporaneous with the investments.

And then just the last question, can you talk about the component supply constraints a little bit more in detail, where have you seen the most constraints and what's going to change that from -- to get back to sort of a normal supply environment?

Well, it started with some of the IT spending increasing late last year in October, November and really in the semiconductor area memories were really tightly constrained and actually some of those areas have improved a bit, some of the more responsible semiconductor companies have actually decided to bring additional capacity online.

But as the overall economic recovery broadens into some of the other areas and actually starts to touch industrial controls, medical accounts, other areas of consumer spending like printing and even white goods, we're starting to see some really type of supply constraints that we haven't seen in a long time.

On things like relays and ferrites and [moscuts] and even some capacitor types of commodities which have been in plentiful supply for several years and I think the supply base in some of those lower level areas -- I don't mean lower level from a prestige standpoint, just in terms of lower level in terms of expense on a typical bill of material -- they're going to lag their investment in capacity a little bit longer until they actually believe that the economic recovery is sustained.

So, what we see is an elongation of lead times and we'll probably continue to see that for a while and it's been difficult to predict with the type of specificity that we'd like with customers exactly what we'll be able to ship and when.

So I think we're probably looking at a couple two, three more quarters of a little bit of a dicey supply situation.

Great.

Thank you very much.

Okay.

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

Yes.

The ramp-up in CapEx to 150 next quarter for Green Point, what's the pace of investment beyond the May quarter?

I think you previously talked about 200 to 250 for the year in CapEx.

It seems like you'll be well above that, so could you just give us an update there?

Yes, Brian.

This is Forbes.

I'll take that one.

I just want to be clear in terms of my prepared remarks.

The $150 million in our third fiscal quarter is not all related to this mechanical expansion.

It's somewhere in the region of $70 million to $80 million associated with that and the balances are ongoing and maintenance type CapEx levels and IT infrastructure and buildout as we talked about in previous quarters.

Having said that, our CapEx levels in our fourth fiscal quarter should return to more of a normalized level in a $50 million to $70 million type arena.

So that would put us somewhere about what, 300 to 325, something of that nature for the fiscal year.

And how much incremental revenue are we talking about related to these new ones?

Again, it's an area that we can't get into.

I remind you that the mechanical operations though tend to be a much higher value add revenue stream and so the revenue levels are not what you might see in the typical printed circuit board assembly, system integration type of revenue stream.

So the revenue levels will be a little bit lower than you typically expect, although with the addition of value add and the revenue stream, we believe the returns should be good for the Company and certainly meeting what we have.

So it seems like the EMS division really has been driving the contribution margins for the last few quarters and they're very healthy at over 4% for the quarter you just reported with consumer break even.

So should we expect the further improvement in contribution margins up to the $3.5 billion per quarter, should we expect that incremental profitability to largely come from consumer given the ramps we're talking about and the break even status of that business?

Yes.

I think looking at consumer being a break even sector, keep in mind we have some consumer facing businesses in the EMS division, but in a February seasonally down quarter for consumer you'd expect significant margin improvement from consumer in the better quarters, our fiscal quarters of Q3, Q4 and fiscal Q1.

So the next three quarters should be progressively better for consumer.

I would discourage, though, people to look at that in a division by division basis and I continue to focus people on the $0.10 to $0.15 of operating leverage per incremental dollar of revenue right up until the $3.4 billion to $3.5 billion revenue per quarter range and this is based on the guidance for Q3.

It's now four, five quarters in a row of being able to demonstrate that type of operating leverage.

So I think people can still be reasonably comfortable that that's the operating leverage they'll see as revenue recovers into that $3.4 billion to $3.5 billion per quarter range.

Thanks a lot.

Okay.

Your next question comes from the line of Lou Miscioscia with Collins Stewart.

Mr.

Miscioscia, your line is open.

Sorry.

I had you on mute.

Is this better?

That's better, Lou.

Okay.

Great.

Thank you.

Luckily, I figured that one out.

I'm very technical here.

I thought maybe she butchered your name some badly that you didn't realize it was you.

No.

No.

Usually you pick that one up.

Would stepping out of auto -- can you give us your tactical and strategic view on consumers?

Is it still an area that you want to heavily pursue or are there pockets that you're more interested in and then also if you could just comment on the big picture of consumer, is there a lot still to be outsourced to the EMS providers?

That's a great question.

I think that we're being a bit more selective in the targeted areas of all of the businesses that we pursue and whether it be the EMS division or the consumer division.

I wouldn't say that we are casting a wide net over the consumer electronics industry.

I think we're hunting with rifles or spear guns to use a more nautical theme to it.

But being a little bit more selective and I think the mechanics operations in Jabil Green Point clearly is an area that we think merits investment, based on the market opportunity and the return opportunity there and the actual innovation and process technology that is advancing there, which really commands the type of differentiation and the value proposition we present to customers.

And we actually think some of those capabilities can be cross-fertilized into some of the other market segments that we participate in such as medical.

So we're looking at that as an investment platform.

In the other areas of consumer where we haven't established position I think we -- we're really looking to be efficient in the employment of our capital, drive margin expansion, drive very high levels of performance and customer satisfaction in the major relationships that we have and really support them but not focus on a great deal of top line expansion.

And then in the EMS area, the same type of theme and areas that are relatively mature and that represent large scale commercial relationships.

Really focusing on being efficient with our capital, deeply satisfying the customers and focusing on margin improvement and in areas that we regard as higher growth-like Clean Tech and the smart grid and medical, industrial instrumentation, defense and aerospace, really have those be areas that will command much more -- a greater deal of our investment dollars.

Okay.

Switching topics a little bit on the component tightness, can you mention which areas you're I guess running into the most difficulty with?

Yes, I'm not a supply chain expert.

I think about it more customers and I'm not going to say who the customers are.

But it really started in A6 and semiconductors and has gone into lower and lower level components.

Even -- in some cases we're even having some constraints in fab supply.

But it's a pretty broad spectrum now of challenges and you know it's not something that keeps us from being able to run our business effectively.

But it's something that causes us not to be able to fully optimize the demand output that we might be able to marshal otherwise.

And also impedes our ability to run with the complete level of efficiency that we might otherwise.

Okay.

Thank you.

Okay.

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

Thanks.

Good evening, guys.

Just a question on the inventory, looks like it was up about 10%.

Could you just talk about what's driving that?

I mean normally I think inventory growth is a reasonable expectation of what you guys expect for next quarter revenue expectations.

So now I think if there are any offsets in that thought process in terms of maybe you guys maybe building some buffer inventory?

Right.

I think if you looked at our guidance and you looked at our inventory level on a forward basis, we'd be at about eight turns.

So it's not out of line with what we expect to produce in the next quarter.

I think we're being relatively conservative in our guidance and yes, it's a little bit tougher to manage the whole supply chain when there are -- again it doesn't do you any good to have $149.50 of $150 bill of material.

If the last $0.50 doesn't show up, you can't ship the product.

So in order to deal with that there is a little bit more buffer and a little bit more slack in the chain in terms of how effectively we can manage our investment in inventory.

That said, I would -- we would expect inventory turn rates to improve a bit in the next quarter or two.

But I wouldn't expect any break-throughs in terms of inventory turnovers.

So I think you're looking at a combination of a growing revenue profile and forward quarters and combined with a component supply marketplace that's been constrained and difficult to manage and you can see in, Amit, with the industrial instrumentation and medical segment up 14% sequentially, some of the other higher mix parts of our business up sequentially, those tend to be lower inventory turnover businesses so that kind of is an element that's a little bit challenged on the inventory side.

All that said, I think we ought to be able to manage back to an eight turns at least and then over the next three or four quarters get back to that nine level that we've been targeting.

Got it.

And then just a question on the CapEx plans, as I recall, I think Green Point was running around $556 million in annual revenues.

Can you tell me what sort of revenues can you support for Green Point with the current physical capacity that you have and what sort of incremental dollars can you add to that capacity with the $70 million uptick in CapEx?

Yes.

I can't really get into that.

We haven't provided any investor transparency to Jabil Green Point other than what we had in the beginning because they were a public company.

So I'd rather not get into that, but at that level of CapEx it would be -- it would add significant growth to their business.

All right.

And then I'm sorry if I missed this but did you guys talk about if you had any customers over 10% of revenues in the third quarter?

Yes.

We said two, two customers over 10% in the top 10 -- 58%.

Thanks a lot.

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

Hi.

Thank you.

I had a question about the mobility segment.

It seemed like it was a bit weaker than you expected.

You commented it was a bit weaker, but it sounds like you're investing in that.

So I'm trying to understand.

Did you see a weakness in the engines pieces of the business?

Is that something that you're maybe deemphasizing or was that a customer issue and now you're moving to the mechanic phase and you're focusing on that?

Can you maybe help us reconcile those two different businesses and the weakness that you saw in this quarter?

I think the engine side of it represents the greater part of the revenue stream overall, although there are no major particular issues driving mobility being a little bit weaker than expected.

A couple of the products that we build were a little bit weaker than the overall mobility marketplace.

There's a couple of products that may be going end of life relatively soon, but we have some replacement products to bring back into the revenue stream.

So the customer relationships and the basic program participation is in good health.

So you would expect that to be back to sort of normal seasonality as we move into the third and the fourth quarter?

Yes.

Okay.

And then I wanted to dig into the inventory issues a little bit.

How much of your revenue would you say was impacted by the component shortages this quarter?

Last quarter I think you said somewhere around $50 million to $100 million I think you said -- $50 million to 75 million?

Yes.

We said $50 million to $75 million.

We didn't quantify it this quarter.

We get into some debates around well, what's perishable, what isn't.

Yes.

I mean, you can count on the fact that we were gaited by material.

Revenue could have been higher, although we want to get away from quantifying that.

Okay.

And in terms of the inventory that maybe you're building buffer stock of, is that primarily semiconductor inventory?

Is that -- I don't know -- 50% of it's semiconductor and the rest of it is other components or maybe to get a sense of where the real tightness is?

Well, in terms of our overall spend, I mean semiconductors, memory, those are high priced components and end up being a bigger part of our billing material and material costs anyway.

So to the extent that we have additional inventory levels comprise a greater part of it .

I'd say that the way we deal with this type of situation in terms of material continuity, supply continuity is more around the challenges are more around mix management and being able to predict and commit to customers' reliable schedules so they can in turn commit to their customers.

So the challenge is really about mixed management, not as much as expanding buffer supply and again I don't think that that part of the equation is really the bigger part of the equation.

If I look at inventory turns on a forward basis and where revenue levels are going, it looks to us like although inventory levels are a little bit puffy and a little bit higher than what we might have expected, they seem to be at reasonable levels as we look forward into fiscal Q3 and we look at the challenges we have to manage

Okay.

All right.

That's helpful.

Thank you.

Okay.

Your next question comes from the line of Wamsi Mohan with Banc of America-Merrill Lynch.

Hey, thanks a lot.

My question is a clarification actually on the midpoint of the guidance.

I think I already heard Forbes say that the incremental gross margin per revenue dollar, the midpoint is $0.14.

Is that excluding the $5 million or so of investments that you're talking about for the program ramps related to Green Point?

That related to the cumulative impact.

On this call a year ago we talked about a $0.10 to $0.15 incremental income leverage per revenue dollar.

So that's the actual growth from this time last year through the end of our third fiscal quarter.

Okay.

Thanks.

And in terms of the investments in Green Point, why should we not think that your incremental gross margins are actually going to be higher or remain in the $0.10 to $0.15 at a higher revenue level given the mix impact that will potentially come from Green Point?

We previously talked about that $0.10 to $0.15 up to that $3.4 billion, $3.5 billion and the answer to a previous question, we're not providing any guidance or transparency around these incremental investments in terms of the revenue stream that that will garner.

But certainly that is a higher portion of value add in that area of the business that would certainly afford us an opportunity to continue to expand our overall corporate operating margins.

Okay.

Thanks a lot.

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

Yes, thanks.

Just a question on the guidance for the EMS sector up 8%.

Is that -- are you expecting to see the strength across the board or just a couple of segments continuing to do well like computing and networking?

I think we have to say kind of across the board.

One, because we actually -- we don't want to get into the sectors in terms of guidance.

That tends to be a little challenging for us but in truth we are seeing strength across the board.

And Tim, is that just end demand or are you seeing some new projects come online as well?

It's a combination of both I think in some of the more mature sectors it represents a tailwind in demand and then some of the targeted areas we're doing a lot better in terms of win rates and expansion of existing relationships in market share.

Okay.

And a bigger picture question.

As you expand your business and your headcount over the next few quarters, do you expect to encounter or are you seeing any issues in term of labor costs particularly in China or getting headcount back because of some labor shortages?

I think we have some challenges with that, but nothing that isn't manageable.

Okay.

Thank you.

Your next question comes from the line of Joe Wittohn with Longbow Research.

Hi.

Joe calling in for Sean Harrison.

Can you hear me okay?

You bet.

Hey, I wanted to go back a couple questions ago Wamsi was asking about the incremental margins.

I think I understand Forbes with the $0.14 you were referring to was on a year-over-year basis what you've done.

But am I looking at it right when I strictly look at the make order guidance on a sequential basis, it looks like at the midpoint of guidance you're adding $200 million in sales and at the midpoint of EBIT we're adding about $15 million in EBIT so about an incremental EBIT margin of about 7% to 8% somewhere in there.

And then, with the guidance calling for flat operating expenses and flattish R&D, I guess the incremental gross margin is also about oh, maybe 8%.

Is that accurate?

Yes.

Yes, that's absolutely correct and that includes we called out about $5 million of investment associated with the infrastructure, hiring of employees both direct and indirect labor and infrastructure to support these new program ramps and the mechanicals capabilities.

Okay.

So taking into account that $5 million, that adds a few points and you're probably down at the low end of the 10% to 15% range.

So I guess the question is going forward assuming consistent mixes is that a reasonable level to model kind of taking no count of the normal fluctuations from EMS versus consumer that you would see on a margin basis?

I guess is 10% a good -- are we assuming, that we're kind of at the lower end of the 10% to 15% range going forward from here now that we've hit these revenue bogeys?

Yes, absolutely.

Up to the level of a $3.4 billion, $3.5 billion, absolutely.

We've demonstrated over the last few quarters this operating leverage and that certainly from limply as we move forward here.

Okay.

And just a real quick one, SG&A you felt pretty firm over the last four quarters now.

Back in the August quarter you were doing $117 million.

The current quarter guidance is for $120 million.

The question is that level sustainable assuming these I guess consistent revenues from here?

Yes.

I think, $120 million give or take $1 million or so is I think a very sustainable level as we move forward.

I think that should be sustainable beyond the $3.4 billion.

We're working diligently to control and compress our SG&A spend and when we get beyond that $3.4 billion to $3.5 billion per quarter revenue run rate at which point our capacity absorption has taken place, we will still expect to enjoy operating expense leverage at the SG&A line.

Okay.

Fair enough.

Okay.

Your next question comes from the line of Amitabh Passi with UBS.

Hi, thank you and apologies for the background noise, just a clarification, Forbes.

What's the best way to look at incremental operating margins?

Is it more on a sequential basis or year-over-year basis because it seems like you look at it on a cost of two different ways you should have had different levels of drop here.

I just wanted to clarify that 10 to 15.

Is it more on a year over year or on a sequential basis?

I think we should be looking at on a sequential basis as we move forward.

We do have this incremental investment in terms of this quarter as we called out, but certainly as we move forward, we should look at that on an incremental basis as we drive towards revenue levels of $3.4 billion to $3.5 billion.

Okay.

Got it.

And then just one final one, Tim perhaps for you.

The telecom segment you've had two quarters now of sequential declines, just wondering is it just a function of your end markets you had a program you're sort of backing away from, any additional color on that market?

Yes.

There's a particular customer program that actually isn't engaged in the GSM fiber optic transmission type of products that we've been targeting in that area.

It's more in terms of mobile communications, network communications.

It's experienced a severe slowdown in orders that had a negative impact on the overall ribbon levels there.

If you look at the areas of our business that we're really targeting, the major telecommunications, particularly in Europe, customers that we're targeting and the types of wireless and wire line infrastructure products, we've actually done pretty well there and have actually added some pretty significant new program wins and we would expect to see the performance in that telecommunications sector really start to turn around over the course of the next two, three quarters.

So I'm actually fairly bullish about our position there.

Okay.

I appreciate it.

Thank you.

Okay.

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

Thank you very much.

Forbes, on this additional investment that you have, should we expect a little bit of a ramping or initial burden on the OpEx line?

Typically you install equipment.

It takes your workers a little bit of time to get the yields up and then a follow onto that Forbes, is when you start looking at your revenue outlook of $3.4 billion to $3.5 billion and the operating margin associated with it, at what point do you as CFO say okay, we're getting within close enough distance, which your guidance now on the high end is $3.3 billion that maybe now you need to start installing some more equipment?

It seems like we're getting close to that standpoint.

And then maybe a question for Tim.

Tim on, this investment in Green Point, is it a single company specific or is it one that you'll be able to leverage across over multiple platforms or how should we think about that risk reward of that large capital equipment?

Let me try and take I think it was the second comment you made and then I'll have to circle back with you on the first one but in terms of I think the question centers around, when do we start making investment decisions beyond that $3.4 billion to $3.5 billion level where we see current capacity levels absorbed?

Given the marketplace today and remembering that in the November quarter of calendar 2008, before we saw the recessionary environment most companies in our space were certainly gearing for significant continued growth.

Now with that, returning those levels of $3.4 billion, $3.5 billion at year end, equipment tends to be pretty readily available.

So we're in a fortunate position today where we don't need to be making investment decisions much beyond a four to six week time cycle, if you will.

I think the biggest concern we have today in terms of making those investments centers around material and component availability of which certainly on longer lead times now than equipment.

So, we need to see some clarity around additional capacities coming on and the various component marketplaces and once we see some clarity in that regard then we'll start considering those further investments, but certainly we're under no pressure in terms of equipment, surface equipment, testing equipment, anything that is related to production through-put.

When we talk about OpEx, just in terms of vernacular, we look at cost of goods sold and sometimes we use operating expenses interchangeably with SG&A.

So when you say OpEx and the investment and factory workers, installation, that type of thing, that's for us cost of goods sold area and the $5 million that we're talking about being devoted to that area embeds that assumption in the guidance and, of course, we'll work diligently as we can to contain and compress our SG&A spend.

You asked a question about the investment bank for a single company or a broad based, the risk reward.

Not really in a position to provide that level of transparency.

I will say generally, though, our policy is that when a capital investment is so custom and specific to a single customer, we would ask them to invest or buy that equipment or consign it to us.

So long term this is a capability that we think has a broader -- a broader set of customers and opportunities than a single customer.

Great.

Thank you very much, Tim and Forbes.

Okay.

Your next question comes from the line of Mickey Schleien with Ladenburg.

Thank you.

My question's been answered.

(Operator Instructions) Your next question comes from the line of Kevin Smithen with Aerogon

Hi, sorry, I think you've answered it but just trying to get -- quantify if you can break out the inventory between raw materials, components and work in progress and fixed -- sorry, finished goods.

I don't have that data in front of me right at the moment, but it is-- in terms of dollar terms, but it is relatively consistent with the -- on a percentage basis with that of last quarter, which is in our filings, but I can certainly follow up with you after the call.

I don't have that data in front of me.

Okay, great.

Thank you very much.

Okay.

We appreciate everybody's time on this call.

I think that for us, the take-aways, we're very pleased with the lowest level of seasonality in fiscal Q2 of 2010 that we've seen since 2004.

We've enjoyed significant margin expansion year-over-year of 170 basis point at the core operating income line and 180 at the gross margin line.

And we think that's a reflection of the better efficiencies in our business focusing on cost and customers.

We also think it's indicative of the business environment improving and our position to capitalize on an improving business environment in a better functioning engine provides them a lot of confidence for us in being able to deliver both revenue growth and margin expansion in the next few quarters.

And when we think about inventory or capital investment, and the strength of our relationships in business in targeted markets that we feel very good about our position and our ability to deliver an excellent record fiscal 2010 and we will continue to look forward to build the business in fiscal '11 and beyond.

So thank you, everybody, for your time.

Thank you.

This concludes today's conference.

You may now disconnect.