捷普科技 (JBL) 2010 Q3 法說會逐字稿

Good afternoon. My name is Patrick and I will be your conference operator today. At this time, I would like to welcome everyone to the Jabil 2010 third 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. Ms. Walters, you may begin your conference.

Thank you. Welcome to our third quarter of 2010 fiscal year call. Joining me on the call today are President and CEO, Tim Main, and Chief Financial Officer, Forbes Alexander. This call is being recorded and will be posted for audio playback on the Jabil website, Jabil.com, in the investor section. The Q3 fiscal year 2010 press release and corresponding slides will also be posted there. In those slides you will find the financial information that we cover during this conference call as well as additional financial metrics and analysis that you may find helpful. You can follow our presentation with the slides that are posted on the website and begin with slide two now.

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 2010 net revenue and earnings results, our long-term outlook for our Company, and improvements in the operational efficiency and in our financial performance. These statements are based on current expectations, forecasts and assumptions involving risks, and uncertainties that could cause actual outcomes and results to differ materially. An extensive list of these risks and uncertainties are identified in our annual report on Form 10-K for the fiscal year ended August 31st, 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 statements, whether as a result of new information, future events or otherwise.

Today's call will begin with some comments and highlights from Forbes Alexander on our third fiscal quarter as well as some forward guidance on our fourth fiscal quarter. Tim Main will have macro environmental and Jabil-specific comments about our performance, our model and our current outlook before we open it up for questions from callers. I'd now like to turn the call over to Forbes.

Thank you, Beth. Good afternoon, everyone. I now ask you to turn to slides three and four.

Our results for the third quarter of fiscal year 2010. On revenues of $3.5 billion, GAAP operating income was $96.5 million. This compares to $7.8 million loss on revenues with $2.6 billion for the same period in the prior year. Core operating income excluding amortization of intangibles, stock-based compensation, restructuring charges for the quarter was $132 million, or 3.8% of revenue as compared to $29 million or 1.1% for the same period in the prior year. Core earnings per diluted share were $0.40, as compared to $0.04 for the same period in the prior year. On a year-over-year basis for the quarter, revenue increased 32% while core operating profits increased 355%. On a sequential basis, revenues have increased 15% while core operating income increased 38%.

I'd now ask you to turn to slides five through eight. As I comment on our revenues. The EMS division grew $256 million sequentially, or 14% versus an expectation of 8%, strong double-digit sequential growth across all but one sector, and a return to growth in our (inaudible). Revenue was $2.1 billion, representing approximately 61% total Company revenue in the third quarter. Core operating income for the division was 5% of revenue.

Our consumer division represented approximately 33% of revenue, or $1.15 billion in the third fiscal quarter. Sequential increase of $180 million or 19%, versus an expectation of 5%. Both the mobility sector and digital home office sectors producing strong double-digit sequential growth. Core operating income for the division was 1% of revenue. Our aftermarket services division increased by 8% from the prior quarter, to $211 million and represented approximately 6% of overall Company revenue in the quarter. Core operating income for the division was approximately 8%.

In the third fiscal quarter, two customers accounted for more than 10% of revenue. And our top 10 customers accounted for approximately 60% of total revenue. Our selling, general and administration expenses increased by approximately $4 million to $124 million, research and development costs, $6.3 million, while intangible amortization was $6.2 million in the quarter.

Stock-based compensation was $27.5 million in the quarter. The increase was primarily related to performance based equity awards, which were previously deemed unlikely to vest in the fiscal year. But based on current expectations, are now expected to fully vest. Our net interest expense for the quarter was $20 million. And the tax rate on net core operating income is 22%.

I'd now ask you to turn to slides nine through 11 as I discuss our balance sheet and some of the key ratios. Our sales cycle in the third quarter contracted by one day to 16 days, as a result of a one day reduction in days sales outstanding. We continue to generate cash flow from operations, producing $37 million while revenue grew 15% sequentially. A return on invested capital was 22% in the quarter, approaching all-time record levels of return. We are very well positioned to pass that mark in the upcoming quarter. Cash and cash equivalents were $600 million at the end of the third quarter, with no sums outstanding on our $800 million revolving credit facility. Cash balances also reflect a reduction in overall debt levels of approximately $50 million in the quarter.

We're also pleased to note that during the quarter we expanded our accounts receivable securitization facilities by $150 million, providing us with continued cost effective liquidity and flexibility as we continue to grow. Available liquidity at the end of the quarter on these facilities was approximately $175 million. Our net capital expenditures during the quarter were approximately $127 million, but lower previous expectation of $150 million in the quarter. Our depreciation for the quarter is approximately $63 million, with core EBITDA at $195 million or 5.6% of revenue. In summary, we're pleased with the quarter's results.

Sequential revenue growth of 15%, and core operating income at overall targeted levels. Exactly a year ago, I discussed our overall financial operating goals. With this quarter's results, we've achieved these goals. Working capital management remains well under control at 5% of annual revenue levels. While cash flow from operations for the third quarter produced $142 million, while revenue grew 23% over the same time period.

We are extremely well positioned to continue to produce strong levels of EBITDA and positive cash flow from earnings over the coming quarters. Providing us with ample liquidity to fund our continued growth. With our long-term target of annual revenue growth rates in a range of 10% to 15%, our business model is positioned to produce free cash flows of 25% to 35% of annual EBITDA dollars. In such an environment, we would expect investments and capital expenditures and working capital to approximate 15% of incremental annual revenue growth.

I'd now like to turn to business update and some fourth quarter guidance and I'd ask you to turn to slides 12 through 14. Before providing guidance, I'd like to advise you that we have recently entered into a letter of intent to divest our remaining manufacturing operations in France and Italy. Divested operations would include four sites and approximately 1500 people. Revenues associated with these sites total some $300 million annually, which will have no material impact on our overall operating margin performance on an ongoing basis. This transaction is expected to close during the course of the fourth fiscal quarter, and is subject to final negotiations, customary regulatory periods, and consultation with employees and their representatives. We anticipate a loss of approximately $0.05 per share associated with this divestiture to be recorded in the fourth fiscal quarter.

Now turning to our overall guidance for the quarter. Revenue is estimated to grow sequentially in a range of 10% to 16%, or $3.8 billion to $4 billion. The EMS division is expected to grow 8% sequentially while the consumer division is expected to grow 25% sequentially. The aftermarket services division is expected to have consistent revenues with those of the third quarter. Core operating income is estimated to be in a range of $144 million to $160 million. The midpoint of our guidance reflects revenue growth of $1.1 billion or 39% on a year-over-year basis. And core operating income growth of $87 million or 134% on a year-over-year basis.

As a result, core operating margin is estimated to be in the range of 3.8% to 4%, and core earnings per share in the range of $0.45 to $0.50 per diluted share. Our selling, general and administrative expenses are estimated to be 3.3% of revenue. Research and development costs are estimated to be $7 million in the quarter while intangible amortization is expected to be $6 million. Stock-based compensation expense is estimated to be in the range of $15 million to $19 million, depending on overall Company performance in the fourth quarter. Our interest expense is estimated to be $21 million in the quarter. While from current levels of production, our tax rate is expected to be 20%.

Capital expenditures are estimated to be $100 million in the quarter. This level of expenditure reflects an ongoing maintenance capital expenditures to support our ongoing revenue ramp. With that, I'd now ask you to turn to slide 15 and I'll hand the call over to Tim Main.

Thank you, Forbes. I'm going to depart a little bit from our typical conference call format and really spend a little bit more time talking about our business direction and what we're up to.

Turn to slide 15. Just in terms of highlights, we're really entering now our second year of very robust recovery from our trough quarter and in fact, if we look at the last 12 months, the last 12 months have been a record year. Last 12 months we've done $12.3 billion in revenue, and recorded record core operating income of $400 million over that period. So last 12 months have been pretty good.

We look at our sequential growth in healthcare, instrumentation, industrial, very rapid rebound in mobility from the previous quarter. We're very, very busy right now. New business pipeline and our ability to continue to grow the business, combination of new business awards and gaining share of wallet with existing customers and really making progress in targeted sectors has been very good. I think we're seeing some evidence of broader trends that we think will shape the industry for the next three to five years and we'll talk a little bit about that in the next few slides, and because of that, and our position in the marketplace, we really believe that we're uniquely well positioned for sustained growth and continued positive financial performance.

Slide 16, please. With that in mind, I think it's appropriate to just do a quick review of some of the tangible benefits we bring to bear on our customer relationships and what it is that we actually do for a living. I think it's a much different value proposition today than it was 10 years ago and definitely different from what I believe investor perceptions are. So some of the highlights of the things that we do today and this would be true of Jabil as well as some of the other folks in our industry, that we really help customers localize supply chains through the consuming regions.

I think that the way that the world has become interconnected and the growth in emerging markets being more and more important to our customer base, our ability to command a global supply chain network for our customers is becoming increasingly important and critically important that we find ways to localize those supply chains to the consuming regions. We're actually today, particularly when we approach the smaller customer relationships that we might have in the industrial instrumentation and healthcare segment, we're really doing a lot more of global supply chain consultation, design and then implementation of that global supply chain network.

We're seeing a resumption and very robust growth in virtualization companies that may be vertically integrated today that would like to globalize their supply chain and move some of that into a virtual model with Jabil, who really don't understand the complexities of many aspects of localizing supply chains and moving into that network and there's quite a bit of consultation and design work up front with those customers. Total life cycle management we think will become increasingly important over the next three to five years, really going through the collaborative design process with customers, helping them go through new product introduction, broad-based global launch of those products, fulfillment, and providing reverse logistics and aftermarket Services to those customers, so complete life cycle management becomes particularly important also in highly regulated industries like defense and aerospace and healthcare and life sciences where product lives are very long and the bill of material for those customers and really help them understand what they need to do to mitigate the risk of having parts of their bill of materials go obsolete.

Global logistics and final product fulfillment should be very familiar with investors today but we have a set of very advanced tools that help our customers look at their total supply chain network and really pick through the many, many choices that there are today and what it means to build parts of their product in one part of the world, ship it into another for final integration, fulfillment somewhere else, along with all of the variables associated with duties, logistics, transportation costs, what happens if oil costs increase and these types of things. So I'm doing a lot of work in that area with some advanced tools.

I think everybody is familiar with our product development capabilities. That continues to expand, particularly in targeted markets. We provide many of the customers in emerging sectors important access to fully scaled procurement leverage and access to global markets. We find many customers that have a very good presence in North America or Europe that would like to establish a presence in Brazil and parts of Asia and we can help them do that. And then I think this is very appropriate, given the recent things that have happened in Asia and the press that it's garnered. We provide very good brand protection to our customers by having uniformly high global and corporate social responsibility standards and we really believe this and we think it's high time that the world paid closer scrutiny to the supply base and we feel very good about our ability to continue to protect the brands of our customers.

Slide 17, please. With all of that in mind, I think the last 12 years have been all in all aside from the very negative experience in the great recession and the dot-com bust, have been a period of very outstanding growth for the Company. I think it's a good idea to revisit our track record over the last 12 years. Our Company has grown revenue and operating income at a faster pace than the industry overall and we think we're on the cusp of another period of very strong expansion.

Slide 18, please. Margins for the Company have expanded rapidly as we focused on cost and lean manufacturing to better leverage our revenue growth. You see the metrics here from Q3, our trough quarter, EBITDA margins have rebounded over 200%, gross margins are in good shape and operating margins have also expanded. We will produce approximately $750 million in EBITDA in fiscal 2010. That's about $244 million higher than it was in the previous year.

Our total debt to trailing 12 months EBITDA today is trending below two to one. I think it's just over two to one in this quarter. The midpoint of guidance will go below two to one. We believe this provides us ample support for expansion. And really just look at the midpoint of fiscal Q4 guidance, the Company will produce $3.43 per share of EBITDA. So that's I think kind of an interesting metric to review in light of where we've been.

Slide 19, please. Latest quarter EBITDA margins compared to our peer group industry average, the names of the companies are highlighted at the bottom of the slide. As you can see, based on the most recently reported quarter, we are exceeded the industry average in terms of margins.

Slide 20, please. With that in mind, and really now that we're in the second year of rising results with margins and return on invested capital at acceptable levels, I think the question is really where do we go from here and how can we generate additional profitability in our business. Number one of course, we will leverage SG&A as we continue to grow revenue and I think investors can expect us to continue to focus on controlling SG&A cost and provide that operating expense leverage.

But another important element is a more fundamental change to the balance of our portfolio of markets served. And this distinguishes areas of our business that we would regard as more mature, a little bit more cost focused, areas that are more growth focused. I'd like to distinguish the EMS assembly part of mobility from the materials and technology services part of mobility. We report those sectors together but they are very distinct in terms of the profitability profiles of the business and our go-forward strategy. Today, the mobility EMS portion of our business, digital home office, which includes our printing business, set top box business, and our data center IT, which would encompass networking, telecommunications, as well as computing and storage, comprise about 61% of our overall revenue. While aftermarket Services, emerging growth sectors of defense and aerospace, instrumentation, industrial, Clean Tech which combined is $1 billion business for us today and the healthcare and life sciences area of our business, and then the Jabil Green Point materials technology portion of our business comprises 39% of our revenue. So with that as background, that is where we are today.

Move to slide 21. Longer term, our strategy is to place more emphasis and investment in the sectors on the right hand side of the pie chart and I'd like to point out the differing growth rates that we would expect long-term for these sectors, not because any of these are less attractive in terms of customers that we serve and in fact we have great customers and important relationships throughout this area. But in terms of where we think growth will come from over the next three to five years, and these sectors on the right hand side of this bar chart we are targeting 50% of our revenue in these sectors and our expected long-term growth rate in these areas is 20% to 30%.

The sectors on the left hand side which will be a little bit more cost and efficiency focused, we would expect the growth rate to be a little lower, in the 5% to 10% range. And we believe that in the end, three to five years out, this will fundamentally change the margin structure and profitability of the Company and help us to continue to drive operating margins above 4% long-term. And of course, return on invested capital we believe at the midpoint of guidance, return on invested capital in Q4 will be approximately 25%, and we think we can run the business at an ROIC of as high as 30%, depending on market conditions and where we are in the business cycle.

Slide 22, I think there's strong evidence that the Company can drive this growth, particularly in these targeted segments. Our experience has been very positive since 2004. And we're seeing acceleration in that growth year-over-year from 2009 to 2010, with about a 33% year-over-year growth rate in the sectors of instrumentation, industrial and healthcare, aftermarket services and aerospace and defense. These businesses alone now make up approximately 30% of our business. That's a $4 billion business today.

So a very, very strong growth rate since 2004, strong growth over 2009, and we think we have a value proposition which is very attractive for customers in very sizable growth markets. These markets tend to have very low penetration rates. The level of outsourcing ranging from 10% to 15%, depending on whose data you read and this is a very large industry combined $200 billion to $300 billion industry for us. So we feel like we have a desirable value proposition for very attractive customers in these sides of the growth markets.

Slide number 23. We really believe that the best companies in our industry can grow, and I think the good news here is that the industry overall is growing, and this slide is really not about taking business from other people in the business. In fact, very little of that happens in our industry. I mean, incumbency is very valuable, and it's not common for us to take business from each other.

But in terms of the pie growing and Jabil's ability to garner more than our fair share of that growth is something that we're very focused on as a management team. We've done that since calendar year 2004. You can see our growth rate since calendar year 2004 has been. Five competitors typically associated with the North American EMS base have not been able to grow at that rate.

Slide 24, please. Talk about top five drivers of sustainable growth for our business, because I think it's important that we really take a look at what the foundation of our business is and we're really driving to deliver our customers superior operational performance, service and quality. And if we do that, we can garner a greater share in an industry that is outpacing and has outpaced macroeconomic growth for really the last 22 to 25 years. I've been here since 1987 and the industry has shown year-over-year growth in all throughout that period. So it is an industry that outpaces macroeconomic growth and if Jabil continues to focus on superior operational performance, service and quality for our customers, I think we continue to garner a greater share of growth in that industry.

Secondly, we're really seeing accelerated growth in target market sectors. A little bit different driver, couple of very good trends in our favor. One is that we're in an early stage of virtualization in healthcare and life sciences. Industrial markets, instrumentation and defense and aerospace. So again, this is a process where the sectors are very lowly penetrated by our industry. They have a lot of needs that we have a value proposition for to help them go out to the global marketplace and we think we're in good shape to continue to take advantage of that trend.

I think we've also been an early mover to capitalize on the global trend to smart grid, better energy, alternative energy generation transmission and management. Again, this is a $1 billion business for us today and it's been growing at mid-double digits for the last couple of years. Three, we do believe we're in sustainable expansion of advanced IT and communications infrastructure, really convergence of many drivers but our IT facing areas of our business began to recover in the summer of 2009, have continued to show very strong growth and we expect to continue to see that for probably the next two or three years. And some important drivers behind that trend, social networking and streaming video requires a lot of additional bandwidth and storage, corporate governance, document retention requirements in terms of particularly North America but also in Europe.

The productivity that IT investments provide to big companies like Jabil, we've actually been modernizing our IT infrastructure as well. IT refresh, many companies delayed their procurement of IT-related capital expenditures throughout the recession and there's certainly significant catch-up and growing affluence in China, India, Latin America and really what many people refer to as the BRIC countries, folks don't want the low end cell phone anymore, they want phones with cameras and streaming video that requires more bandwidth, requires a more sophisticated wireless infrastructure. All of these things converging we think to provide sustainable expansion of advanced IT and communications infrastructure.

Four, the trend of total life cycle management is very well aligned with Jabil's comprehensive portfolio of services, collaborative design, global logistics fulfillment and after market services, and fifth, increasing global complexity favors fully scaled and sophisticated service provides. It's less about subassembly price today and more about total solution. And compressing total cost around the world and having expertise and knowledge about how to do these things rather than the cost of labor in any particular geography and we think this is a trend that will continue to take place in our industry and favor fully scaled sophisticated global suppliers with a rich global footprint and a rich set of capabilities and services.

Slide 25, let's not forget the post recessionary period expansion that our Company has gone through time and time again. This chart begins in fiscal 1992 for Jabil. I think we made $7 million in total core operating income in fiscal 1992. Take us through fiscal 2010, the shaded areas represent recessionary periods, the early 1990s was a recessionary period, the dot-com bust followed by 9/11 and then the great recession that we all just survived and lived through. The post recession expansion has been extremely robust in each case. Post 1993, the Company went on a six, seven year great run of growth as did the industry. After the 2001, 2002 recession, another significant expansion over a multi-year time period. And we think again we're on a very handsome growth trajectory as we come out of the latest recession.

So in summary, our presence is growing in targeted sectors and we expect that to be complemented by strong growth in our SmartPhone exposure and mechanical components in the upcoming quarters. We really remain focused on execution and satisfying our customers. They have increasingly complex needs in a rapidly changing world and we think we're in a good position to help them work through those issues and challenges. We expect to increase our share in those targeted markets and continue to deliver strong financial results, consistent with our long-term objectives.

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

Thank you. (Operator Instructions). Your first question comes from the line of Steven Fox from CLSA.

Hi. Good afternoon. Tim, I appreciate all the direct comments regarding some of the labor and wage rate issues that have been in the papers lately. I was wondering if I could get you to talk a little bit more about that in terms of what does it mean for your business longer term? You mentioned to start off with that business isn't usually very transient once a program is won. What are the global advantages and maybe some disadvantages that play into your suite of offering maybe over the next 12 to 24 months.

Great question. First of all, cost escalation in China is really not a new thing and the yuan has been appreciated against the dollar for the last three, four years and taxes have been going up, wage rates have been going up continuously. Minimum wages were increased several times over the last couple of years. Having said all that, we have been paying folks in our China operations generally above the minimum wage. The cost escalations that we've seen recently removes a bit of the cushion, but we think the impact to our business, we've seen no labor strike, no demonstrations, no strikes, no other disruptions to our production and we'll deal with that on a basis as it comes up and presents itself to us. But we don't expect any disruptions to our business and we're very proud of the way we treat our people and the way we pay our people and work our people.

So we think we're in good shape there, particularly relative to some of the practices of companies that are head quartered and based in that part of the world. Having said that, we think it makes a heck of a lot of sense for Jabil to continue to maintain a global manufacturing footprint. We have a very competitive side in Penang, Malaysia, competitive side in Vietnam, competitive sites in India, we have great sites in eastern Europe and Mexico. Continued escalation of costs, particularly in China, for large scale production of big IT equipment, for example. We'll make operations in Mexico and eastern Europe look a little bit better and I think the decisions that OEMs will have to make about where product gets built, how their supply chains come together is going to become more complex as the playing field goes through some fundamental changes.

And I think we're at the end of -- it's the end of one era, the era of go vertical big in one location of the world and that's China and that's the answer to your supply chain. I mean, that's been kind of the decade from 2000 to where we are today. That card's been played. It's over. Everybody's in China. Everybody's where they need to be in the world. Nobody's got an advantage in terms of the labor cost or base cost. And now it's not how effective you are at managing the supply chain, how effective you are at transparently running through the various manufacturing ops and then being able to execute and deliver on delivering products that will be manufactured in multiple plants around the world and how responsible you are, responsive you are in managing demand and supply chain networks. So we think it's the beginning of a new era and that era will be more complex and play to the hands of companies that have sophisticated IT systems and a broad-based global footprint.

Great. Thanks very much.

Okay.

And your next question comes from the line of Louis Miscioscia. Louis, your line is open.

Okay. Thank you. I'm at an airport so I apologize for background noise if it comes through. I guess, Tim, well, good quarter. Let me start with that. Appreciate the color on how the mix is changing. One thing obviously that up to about $3.4 billion, $3.5 billion of revenue, you said about 10% to 15% incremental operating margin dollars, incremental dollar. Do you have a new number for us? Obviously I can do the math on the information you gave. I just haven't had a chance to do that yet.

The margin expansion we talked about for the last year was really from a trough quarter so we're not really talking about margin expansion much anymore. We think 3.8%, we're in the zip code of where we expected to be at this point in terms of revenue. We think we can continue to expand profitability longer term through a portfolio management and leveraging SG&A expenses. Quarter to quarter, depend on the mix of our business. So no leverage metrics to track anymore.

Okay. Two questions, big picture questions. Obviously we're all concerned about Europe and wonder if you could comment, if you saw any changes in demand in Europe? And obviously very strong quarter to quarter growth numbers that you gave for all the industries and those are helpful. Could you also help us out with how much you think is new wins and how much of that is organic? Thank you.

I can't help you much, not because I wouldn't like to but in terms of quarter to quarter, we had a very robust recovery in mobility and that's due to -- due primarily to good demand, but also a broadening of our portfolio and the number of products that we build for a small set of customers in that sector. So that was important. We saw 12%, 13% sequential growth in the instrumentation, industrial medical sector which was very strong growth, the second double-digit sequential growth that we've seen in consecutive quarters. That's all organic growth. That's existing customers, share of wallet, new assemblies, all that kind of stuff. And the rest of it was just kind of a rising tide on organic growth. We are seeing more service adoption and the new business wins velocity is increasing. So we feel pretty good about that.

Okay. And then just on the macro environment that you're -- couple of other companies have mentioned --

So, about, I think we believe about 30% to 31% of our production ends up in Europe, bound for Europe, so it's based on European consumption. Right now, we've seen very little change to forecast, very little impact, not to say that we won't. I mean, we always have to be cautious. But I think the hysteria that was going around a couple weeks ago is probably overblown. The major economies in Europe, while they may be struggling, are showing some growth. (inaudible) Countries like Greece and Spain and Portugal are very important. They're just not as big economies as France, Germany, UK, Italy, and the Scandinavian countries and it's just -- we think to put things in proportion, we're not seeing any kind of major disruption in our business.

Okay. Thank you.

Getting a lot of background noise now, Lou.

Our next question comes from the line Amitabh Passi from UBS.

Can you hear me?

Sure can.

First question just had to do with your sequential increases in inventories, up $200 million plus. Just wondering if you could give us some color as to what the driving factors were, again given the strength in mobility, and a lot of that's skewed to the dynamics in the mobility segment, or is some of it sort of in anticipation of again the strong mobility growth that you expect to see in the August quarter, so incremental color around some of the inventory would be great.

Well, we're at seven turns. Our sales cycle is consistent with the previous quarter, so really what you're seeing are heavier inventory investments, and customers really mitigating the risk associated with those inventory investments with faster receivable collections and kind of on a very conscious basis. So we're able to manage our sales cycle in a period of a higher level of inventory investment.

Having said that, look, we think inventory investment at this point is a smart investment. It's very low risk. It helps Jabil and our customers to optimize and capture as much revenue as they can while the demand's there. The material, the continuity of supply issues are still there for the market. The component shortages are spreading across multiple industry sectors. It's still very challenging to manage mix, so we're hand to mouth in a number of areas. All the inventory is purchased through a customer purchase order so there's very little down side risk to us in terms of ownership. We have a demonstrated ability and 90 day window to liquidate inventory so to the extent that business slows down we'll be able to liquidate that investment very rapidly.

So it is not driven by any -- you asked about mobility. It's not driven by any particular industry segments. When I look at the IT areas in the higher mix segments of our business, little bit slower inventory turns than the higher velocity parts of our business. That's always been true. But anywhere you see higher mix business, we're carrying additional inventory and we think that's a smart investment and we'll continue to work, try and work that level back up to an eight turns and -- but for right now, we think it's a very low risk investment for us.

Okay. Then just one other quick question for you. When you show your business breakdown now you kind of break out the mobility EMS segment versus the mobility technology services segment, which is part of Jabil Green Point. Again, just wondering as we look over the next quarter, 25% growth in mobility, are you able to give us any sense is one part of this pie growing faster than the other, particularly beyond this quarter?

Well, the assembly side of the business, the EMS side of mobility will grow faster. You're talking about an electronic assembly with a much higher bill of material content than mechanical components. So that's a higher revenue, lower margin, higher asset velocity business and on the mechanical side tends to be higher margin, higher investment, it's actually pretty good velocity in terms of being a high volume, low mix business, but a higher fixed asset investment per dollar of revenue than what you see in the EMS assembly side of mobility. So when we get bursts in demand, you'll see the revenue grow higher in the EMS side than you will in the mechanic side. Having said that, we're in a period of very strong expansion of our mechanics business and we continue to ramp production there and we'll continue through the August quarter and into the November quarter. So we're still very excited about what's on the horizon for us there.

Okay. Then finally, do you have the precise percentages for your two 10% plus customers?

We don't.

Not at hand. I don't think that we provide that other than on annual basis.

Okay. Thanks.

And our next question comes from the line of Wamsi Mohan from Banc of America.

Thanks a lot. Tim, your investments in Green Point have clearly driven some of the strength in your guidance here. Can you talk about perhaps the sustainability of the strength, I mean, sort of through the course of the next three, four quarters? And secondly, where else outside of mobility are you currently leveraging Green Point. I think you mentioned medical in the past. When should we start to expect a more material revenue contribution from those areas?

Wamsi, just to kind of calibrate, the revenue growth is primarily driven by the EMS assembly side of mobility. And again, the mechanics part of mobility will be a lower revenue business. Having said that, we believe that we'll continue to grow the mechanics business in mobility at a much more rapid rate than has happened over the last couple of years and you asked a great question about fertilization into our healthcare business, potentially areas of automotive and other sectors and we believe that will take place but that's a longer term prospect. You really need to think about contribution in other sectors of our business from Green Point in terms of over the next couple of years, not only the next couple of quarters.

Okay. Thanks. And you alluded to this portfolio shift, going from 60/40 to 50/50 longer term. Clearly the 40 was just translating, the 50 is much higher mix, higher margin, including Green Point there. So how should we think about the sort of operating margin given that mix of revenues.

60/40 versus 50/50.

Yes.

When it gets to 50/50, we'll see.

All right. Thanks a lot.

By definition, it should be better than 3.8, but there will be a lot of moving parts over the next few years but we do think it will -- really the point there is from here, now that we're at 22%, going on 25% return on invested capital, we're right around a 4% operating margin, if not next quarter then certainly within earshot of where we are today, the question becomes is there -- where do we go from here. How do we get additional margin expansion, better profitability in the business and incrementally that will come from leveraging SG&A expenses and shifting our portfolio more towards those higher mix, lower volume segments that are a little bit more value add rich.

Thanks a lot.

And your next question comes from the line of Brian Alexander from Raymond James.

Yes, maybe to follow up on that last question, in terms of that 50/50 long-term split you're expecting between traditional EMS and advanced solutions for lack of a better term, relative to your longer term target of 4% operating margins, I guess the question would be are you expecting margins to expand on both sides of that pie chart or do you think there could be some degradation in one side of the pie chart that could offset some of the favorable mix because I guess to the last question it would seem that your margins could actually get closer to five based on that longer term split. Thanks.

Right. Well, I think it's rational and reasonable to think that the cycle of commoditization continues and we don't expect a lot of margin erosion in the more mature sectors but there will definitely be more cost focus and efficiency focus, so driving costs out of the system, lean manufacturing, more collaborative design, shifting the services from assembly and fulfillment to assembly, fulfillment and aftermarket Services and collaborative design and other things we can do as a business to add to our value proposition for customers there. I think it's rational to think that as healthcare, life sciences, Clean Tech continue to grow in size and scale to our industry, that there will be some commoditization there as well. So there should be some offsetting commoditization and margin erosion over long period of time.

Having said that, if you really kind of do the math and think about that correctly, I think you're thinking the right way about it, I believe. If you're 3.8% to 4% today and you're able to continue to drive lean manufacturing, support mature segments and you're able to rapidly grow these emerging sectors, then we should be moving beyond 4%, closer to that 5% over time.

Great. And then just back to the quarter you just reported, the revenue upside, you guys are pretty good at predicting revenue on a quarterly basis and you just beat the high end of your guidance I think by $150 million in a demand environment that most would agree probably hasn't improved a whole lot over the last couple months, so I know you have some larger programs ramping. Maybe talk about whether that mobility ramp, which it sounds like it isn't, was well above your expectation, but just to go back to that and how are you feeling about customer inventory levels in the context of the revenue upside you just experienced and particularly the explosive growth you saw in industrial and networking. Thanks.

Those are great questions. We generally are better at forecasting our revenue. I think we did maybe a -- we didn't do a very good job of handicapping in a number of risk factors into our Q3 guidance. We were in a very tight material market. We still are, but very tight material market, a number of complex launches of mobility platforms that we weren't sure how complete they'd come out of the gate and they did a little bit better than expected. And we just are winning more business than maybe we have historically counted on.

So I think all of those things combined really surprised us a little bit on the revenue side. I think this time as we look at Q4, we always try and be a little bit conservative but we're trying to give you a pretty fair picture of where we think the revenue strength is and what the quarter's actually likely to turn out. And trying to -- not handicapping as much of the risk factors as maybe we did in the May quarter. Some good reasons for that, the mobility platforms have launched. We kind of know where they are.

We're doing a better job of managing through the material constraints, using tools that we have in demand and supply chain optimization. We're doing a better job of I think communicating what customers can expect from us in terms of throughput and therefore expectations and providing commitments to their customers. So all of that leads us to a little bit more of a -- little bit more confidence around the kind of sequential growth that we're forecasting for the August quarter.

Great. Thank you and congrats again.

And your next question comes from the line of Shawn Harrison from Longbow Research.

Hi, Tim. Congrats on the quarter. First question, just with the mobility business, as we look out, say, into the August and November quarters, is there potential upside to the EBIT margin we witnessed this quarter, that 1%, was it maybe affected just by the additional depreciation being added and where can kind of those margins go within the consumer business for the next few quarters?

It's a fair point. 1% is definitely not at a targeted margin. I would expect that business on an annual basis to be in the 2.5% to 3.5% range and we're going through some -- actually going through some costly ramps and a significant ramp of a costly program in the mechanical area of the business and launching a number of new programs still in the August quarter in the electronics assembly side. So that puts a lot of pressure on the margin side. I think by the time we get into the November quarter, I would expect much better margin performance from that part of the business.

Okay. And then just as a follow-up on the capital spending within the mobility business, do you think you'll be done with kind of the large I guess capital program here within the August quarter or should we expect more in early fiscal 2011?

I think we'll be done with the significant investment we talked about last quarter.

Okay. And then final question is I know when you announced the capital investment last quarter, there was the expectation that you would start to see other customers begin to take interest in the more mechanical side. I guess kind of what has been customer interest level or response so far?

We're not marketing it broadly right now. We're very, very busy launching the program that we're responsible for now and similar to the medical discussion, we think that's something I'd ask people to avoid thinking about in terms of quarterly buckets and think a little bit longer term. We'll be very busy with the ramp that we're going through right now, through the August quarter. I think throughput and expectations will be much closer to where we want it to be by the November quarter and really about early in calendar 2011 we'll be able to maybe sit back and look at hey, let's approach other customers and other industry sectors to see if we can broaden the appeal of that investment. So we're probably six to nine months away from being in that position.

Okay. Thank you.

And your next question comes from the line of William Stein from Credit Suisse.

Hi. Thanks. Wondering if you can comment, Tim, on lead times and shortages and perhaps relate that to inventory, we'd love to know if that has anything to do with the inventory build in the quarter.

Yes, sure. We talked about actually in a previous question that the supply constraints continue and really haven't improved much from the February quarter. Kind of a same, same, and it's really gone into sectors like white goods and even healthcare customers are seeing some issues and getting supplies, so that's been difficult. So, look, I mean, it's -- we look at it and we think that an additional investment of -- an additional investment in inventory right now is a smart bet for us. Again, it allows us to do a better job of managing mix. It allows us to help customers capture revenue in the marketplace and it's just too difficult to predict at this point day-to-day what's going to show up and what we can ship, so -- and demand is going up. So it's a very low risk way for us to hedge against component shortages. So it definitely has something to do with why we're at seven turns and not eight or nine.

So it sounds to me like this is not a matter of incomplete kits because you had a supplier failed to deliver because of a shortage, it's more of a strategic investment. Is that fair?

That's fair. It isn't an incomplete kits on a single program customer because of a single device. Broadly speaking, though, it is because people are fearful of incomplete kits and being line down. So a more significant investment in inventory allows us to do a better job of managing mix.

People need to realize that I think it's 70%, 80% of our output is built on lot quantities of 100 or less. Maybe it's 200 or less. Very, very high mix business today. It's tough to manage a high mix business in an environment of material constraints. And I think if you look at people in our peer group, a Company likes Plexus probably turns inventory I'm not sure what it is, but four or five times. They're running a business that's kind of a proxy for what our instrumentation and industrial medical segment would like and so it's just -- it's tough to get good inventory velocity, even though revenue's going up, in an environment where material constraints are lurking around every corner.

So it is a strategic investment. Customers are asking us to do that. We're responding with additional investments. The sales cycle isn't expanding appreciably. Many customers are mitigating the additional investment in inventory with accelerated accounts receivable payments. And we'll continue to work closely with customers to mitigate our risk and yet allow them to capture as much revenue as they can.

That's very helpful. One follow-up, if I can. It looks like this new investment in Green Point is starting to pay off much -- it seems much more quickly and successfully than kind of the first initial go you had in the components business a few years ago. Thinking longer term, are there other verticals that you might attempt to go into or other products that we might see come out of Green Point in the next coming quarters?

I think we're pretty set in terms of where we think it's smart for us to invest in vertical integration. Again, I think over time the material technology services area of our business and that's really an intentional new brand for that part of our business, and it connotes the strategic intent to broaden the mechanical operations there into the healthcare industry, life sciences and other important parts of our business. So that's just -- it's more than just the label change for us. It does have some meaning to it. It won't be meaningful to the overall business for the next -- for another year or so. But we think that's important.

In terms of vertical integration, I think on a one-off here and there joint venture to provide enclosures in a particularly difficult geo-localizing supply chains, for instance, in India, when we first started building set-top boxes in India we invested in a presence in a current mechanical supplier to place in operation in India in order to localize the supply chain. So here and there we'll find parts of the world where the supply base is inadequate locally and make investments to ensure ourselves of world class supply. But other than that, I don't expect to see -- you shouldn't expect to make any additional big investments in vertical integration.

Helpful. Thanks very much.

Okay.

And your next question comes from the line of Jim Suva from Citi Financial.

Thank you and congratulations. It looks like your mobility really, at least if we look at the different segments of the consumer segment, growing 19 versus 5%, mobility up 20%, 23%, looked like that was really the biggest upside. Maybe if you could just let me know if that is indeed correct and was that more from the growing of this new big CapEx program you put in or, Tim, I thought I heard you mention a few minutes earlier ago that the materiality of that won't come for some future time period.

Jim, it's Forbes. You're correct. Tim's characterization there was these investments will start to bear fruit in the coming few quarters. The upsides here, mobility were as we talked about earlier, ramped some electronics based production, that continued in this upcoming fourth quarter. And some of our revenue guidance, perhaps you handicapped fully the nature of these ramps, the timing of these ramps. So we're very pleased with the way those ramps occurred in the third quarter and how they continue in Q4. But it's principally electronic based. There was some contribution from our mechanical area but that will start to bear fruit as we move forward here.

If anything, we had margin headwinds from the mobility area because of the growth in electronic assembly was much more robust than the mechanical side and we're going through the ramp process now with mechanical investments so don't expect that to be profitable during the ramp period. And so if anything, we had headwinds there, and I think we were able to drive very good efficiencies in the rest of the business and deliver a 60 basis point improvement in operating margin, so we felt that was pretty decent performance given the circumstances.

Great. That exactly leads me to my short follow-up. If that's the case which I assumed it was, it seems hard to believe why 4% is the run rate, why the 4% operating margin shouldn't be much higher when you're facing such the ramps that you did from the large CapEx involvement and the ramping in the yield should improve, that it seems like 4% should be kind of more the baseline rather than the target goal and it was just a few years ago when you were consistently for multiple quarters hitting 4.5% margin. So Forbes and Tim, you were kind of given a history overview for a good chunk of this earnings call. Maybe you could talk about could we be looking at going back to 4.5%, or why shouldn't we be?

I don't think there's any reason that what you're saying isn't true. What you're saying probably is true. We just haven't provided any guidance beyond the August quarter. And we try not to back into that. I know people are going to struggle with all right what the heck am I going to put in my 2011 model now. Company's doing about $4 billion in revenue and that implies at least a $16 billion number in 2011 and what kind of operating margin do I -- we'll provide as much help as we can when we get to the September call. That's about all we can do right now.

I wouldn't argue with you a lot. There's lots and lots of risk in the business. There's lots of things that can go bump in the night. Still people think there's going to be a double dip. We don't see that. I think what we're saying is don't ever expect us to go over 4%; this economic model works great where we are.

If we do 3.8% to 4% operating margins in the August quarter, we're going to drive 25% return on invested capital. At that level alone and $16 billion 2011 will drive almost $1 billion in EBITDA and probably drive 30% to 35% free cash flow, after paying for interest and dividends and CapEx and working capital consumption, everything else. So yes, the margins can go beyond 4% but where we are today is something that fundamentally is very sound.

Thank you and congratulations to you and your team for a good quarter and great outlook.

You bet.

And your next question comes from the line of Sean Hannan from Needham & Company.

Yes, good evening. So I'm going to keep it to one question, but kind of multi-part. Tim, thanks a lot for the strategy comments. That was actually I think very useful. When you look at this space today and you talk about the pie growing, gaining share of wallet of your customers, you talked about as well some of the examples of increasing efforts around life cycle management, consultation, et cetera. Can you share some of your views on how this make your relationships more sticky, the importance of that in your approach and then when you look competitively how do you expect others in the industry to execute on a similar type of approach?

Great question. I mean, it's really all about making these relationships so fundamentally powerful and the group of companies so small that we must be one of two or three manufacturing partners to the most attractive companies in the world. Period. I mean, that's what it's all about. And our ability to do that, if we were just to say look, we can be the best circuit board assembler in the world or we're just going to provide commoditized services from low cost regions, we would shut down more plants, we would jettison more SG&A, we wouldn't invest in design. We wouldn't make the investments that we've been making over the last 10, 15 years.

We think the world's changing. Every seven, eight years, the world seems to change fundamentally in our industry and 2001, 2002, the world changed in the direction of Asia. And Asia will continue to be extremely important, but its importance will become less of a factory to the world and more of a consumption region, and growing affluence and what does rise of the rest of the world mean to the United States and North America, and the more mature economies. So the world's going to change again and it's going to be very complex and the companies with the best IT systems, the best footprints, the best lean operations, the best systems to be able to connect all of the complexity around the world into something that's understandable and simpler to manage and has a very passionate, powerful culture of people that care like crazy about their customers, those are the companies that are going to win and we don't think -- we think there's really just a handful of companies out there that can provide that.

Now, customers want to have two or three suppliers in many cases and there will be big parts of the business that we don't even touch. We'll never build a PC again. We'll probably never build a notebook computer. But for anybody in the world with complex needs, where the customer's providing software engineering, product design, any high mix requirements, regulated industries, those are the types of customers that we think we will be ideally suited for and we think that's a big, expanding market and, you know, I think that it's going to put -- it's going to put folks that haven't invested in systems and tools and don't have a cohesive culture at risk and the companies that do have cohesive cultures and great systems and can make the investments will prosper. And there will be a number of companies in our industry that will do very, very well in that kind of environment.

That's great. Thanks, Tim.

Okay.

And your next question comes from the line of Sherri Scribner from Deutsche Bank.

Hi, thanks. My questions have been answered. Thank you.

We'll move on to our next question which is from Alex --

Operator, this will have to be our last question, please.

This will be our last question from Alex Blanton from Ingalls & Snyder.

I just made it. Thank you. Just quickly, the tax rate again for this year, what are you expecting?

The core rate for the year will be 20% and for the fourth fiscal quarter, also 20%.

20% versus 32% on the year just ended, right?

On a core basis it was also 20%.

Okay. Core basis is what we're talking about.

Yes.

20%. Thank you. Tim, you mentioned that the targeted growth sectors on slide 21, they're growing at 33% for you, or for the industry?

For Jabil. That was -- I don't have the slide in front of me. I think it was about $4.1 billion in fiscal 2010 and $3 billion in fiscal 2009.

Okay. So that's --

33% growth rate year-over-year.

That's a growth rate for the past year.

Yes.

And you said $200 billion to $300 billion total available market?

Yes. When you consider all of those industries combined, it's several hundred billion dollars of addressable market. We think the penetration rate is relatively low.

Do you have any forecast or statistics on that penetration rate, what is it, do you think?

It's different in -- for instance, in healthcare and life sciences, it's in the 15% range.

Yes.

In the industrial instrumentation area, it's probably 15% to 20% range.

Okay.

Aftermarket services, I'm not sure what the outsource percent is but the significant opportunity there is that even the stuff that's outsourced is outsourced in a very fragmented, disorganized way. So there's a tremendous opportunity for us to provide a more rational solution to customers, even though it's outsourced. Very few big players that have dominated that industry. So that's a significant opportunity for us.

Okay. So the $200 million, $300 million includes aftermarket?

Yes.

Okay. I had one other one here. Listen, let me just ask you about Nokia. I don't know if you can talk about that. But they pulled a lot of stuff back in house last year because they said we've got factories and we're going to use them. What do you expect from Nokia going forward?

Our Nokia revenue is very small now, immaterial to our revenue stream. We went through that negative experience with Nokia back in 2007 and thankfully worked through that going on three years now.

Okay. So that's not in -- you're not expecting much of a bump from them at all, then?

No. I'd love to do more business with Nokia, but strictly in the mechanics area, because I tell you what, we avoid like the plague competing with big vertical customers, internal factories, if they're not strategically committed to outsource. You get in any of these soft economic periods and they pull stuff back inside.

Yes.

We avoid that.

One final thing. If I used the high end of your EPS guidance range for the next quarter, and the mid range, midpoint of your sales guidance range, it implies about a $0.10 increase there, top end of your range, $0.50. That implies about a 6% incremental margin on the additional sales to get there. Doesn't that seem low to you, 6% incremental at this time or not.

Not given where we are today. The mobility sector and particularly the electronics assembly sector is driving a lot of the growth in Q4. So there's some margin headwinds against us in terms of the Q4 guidance. I think we're really going to stop talking about, Alex, the operating leverage side of it because we're in a range of performance now where we like investors to think about this is a good business that 3.8% to 4% operating margins, if you just take what this company is going to do in fiscal Q4, Q1 and send that out into fiscal 2011, it's a $16 billion business that wants to run at 3.8% to 4% operating margins, that will produce $1 billion in EBITDA and that will produce free cash flow of 30%, 35% and that's a good business and so we ask people to start thinking about that quarter to quarter at this point there will be fluctuations in how much leverage there is.

As long as you can get that kind of top line growth, you don't need the leverage. Okay. Thank you.

Thank you for saying that. But we're going to absolutely stay focused on driving lean and efficiency and making the business more profitable. But we think over the next three to five years that incremental profitability is going to come from SG&A expense leverage and what we can do to manage, get a better balance in our portfolio.

Thank you.

Okay.

I'd like to turn the call back over to the presenters for their closing remarks.

Thank you everyone. Thank you all investors and analysts on the call today. We appreciate you joining us and please feel free to call in for any other follow-up questions you have on the quarter. Thank you very much.

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