捷普科技 (JBL) 2011 Q1 法說會逐字稿

Ladies and gentlemen, this is the operator. Today's conference is scheduled to begin momentarily. Until that time, your lines will again be placed on music hold. Thank you for your patience.

Good afternoon. My name is Ashley, and I will be your conference operator today. At this time I would like to welcome everyone to the Jabil first-quarter fiscal year 2011 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. (Operator Instructions).

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

Thank you, operator. Welcome to our first quarter of fiscal 2011 call. Joining me on the call today are our 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, Jabil.com, in the Investors section.

Our Q1 press release and corresponding webcast of slides are also on the website. In those sides you will find the financial information that we covered during this call. We ask that you follow our presentation with the slides on the website and will begin now with our forward-looking statements.

During this conference call, we will be making forward-looking statements, including those regarding the anticipated outlook for our business, our currently expected second quarter of fiscal 2011 net revenue and earnings results, our long-term outlook for our Company, and improvements in our operational efficiency and financial performance. The statements are based on current expectations, forecasts and assumptions involving risks and uncertainties that could cause actual outcomes and results to differ materially. An extensive list of these risks and uncertainties are identified in our Annual Report on Form 10-K for the fiscal year ended August 31, 2009, on subsequent reports 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 first fiscal quarter, as well as some forward guidance on our second fiscal quarter of 2011. Tim Main will then follow up with some macro environment and Jabil specific comments about our performance, our model and our current outlook. We will then open it up to questions from our call attendees.

I will now turn the call over to Forbes.

Thank you, Beth, and hello, everyone. Net revenue for the first quarter was $4.1 billion, an increase of 32% on a year-over-year basis. GAAP operating income was $156 million. This compares to $66 million of GAAP operating income and revenues of $3.1 billion for the same period in the prior year. Core operating income, excluding the amortization of intangibles, stock-based compensation, and restructuring charges for the quarter increased 71% to $181.9 million. This represents 4.5% of revenue. This compares to $106.5 million or 3.4% for the same period in the prior year.

On a sequential basis, revenue increased 6% in the first quarter. Our core operating income increased by 16%. Core values to the earnings per share was $0.61, an increase of 91% over the prior year.

As a reminder, at the end of fiscal 2010, we discussed our intent to provide revenue and core operating income under our new structure, a structure that aligns with the long-term specific direction of the Company.

Please refer to slides five and six for revenue and core operating income by each of these segments for the first fiscal quarter.

Our Diversified Manufacturing Services segment grew by 11% sequentially. On a yearly basis, growth of 47%. Revenue was approximately $1.4 billion, representing 34% of total Company revenue in the first quarter. Core operating income of 6.8% of revenue after absorbing 30 basis points associated with reductions in force in our Japan site. Enterprise & Infrastructure segment declined by 8% sequentially. On a yearly basis, this segment grew by 29%. Revenue was approximately $1.2 billion, representing 28% of total Company revenue in the quarter. Core operating income was 4.5% of revenue.

Our High Velocity segment grew by 14% sequentially. On a yearly basis, this segment grew by 24%. Revenue was approximately $1.5 billion, representing 38% of total Company revenue in the quarter, and core operating income for the segment was 2.3% of revenue.

Our top 10 customers in the quarter accounted for 59% of our revenue, and I might ask you to [turn to] slides seven, eight and nine, which will accompany my commentary on the elements of our first-quarter operating and balance sheet performance.

Selling, general and administrative expenses were $122.9 million and represented 3% of revenue. Research and development costs were $5.7 million in the quarter, and intangibles amortization was $6 million. Stock-based compensation was $19.5 million.

Our net interest expense for the quarter was $21.1 million, and the tax rate on net core operating income in the quarter was 17.4%.

Our sales cycle in the first quarter expanded by four days to 16 days. Days in inventory improved by one day, while turns remained at seven. Cash flows used in operations were $82.7 million. You recall return on invested capital in the quarter improving by approximately 200 basis points to 28%. Cash and cash equivalents were $630 million, and there were no sums outstanding on our revolver at the end of the quarter.

Our capital expenditures for the quarter were approximately $101 million, which we continue to invest in infrastructure to support our targeted markets and capabilities. $45 million is associated with our Diversified Manufacturing Services group, $11 million in Enterprise & Infrastructure, $11 million in High Velocity, and $33 million in IT and building infrastructure.

Depreciation in the quarter is approximately $69 million, and core EBITDA is $251 million or 6.1% revenue.

Working capital management continues to remain at approximately 5% of annual revenues. We remain well positioned to produce free cash flows as we move through the second fiscal quarter and the balance of fiscal 2011.

Over the course of the last eight weeks, we've added strategic flexibility to our capital structure, having successfully replaced shorter-term debt with longer-term maturities. In late October, we're placed $300 million of term loan due to mature in 2012 with $400 million of 10-year senior debt, a coupon of 5 7/8, and successfully renewed the terms of our revolving credit facility, replacing our $800 million revolver with a new five-year $1 billion program.

In summary, we are extremely pleased with the results of the start to fiscal 2011. Our goals and plans to fundamentally shift the revenue and income profile of the Company to provide overall sustainable operating performance are positioned well as we move through the balance of the fiscal year. We've made continued solid progress this quarter, resulting in the high highest levels of core operating income and EBITDA since 2006 or 4.5% and 6.1% respectively.

I would now like to provide you with our second-quarter fiscal 2011 guidance and ask you to turn to slides 10 and 11.

As a reminder, our first quarter represents the peak of the seasonal nature of our High Velocity business. Looking ahead, the impact of seasonal shifts with the business should continue to decline as we divest five manufacturing services segment grows to be a larger portion of our revenues. With that in mind, we expect revenue in the second quarter on a year-over-year basis to be up 30% on the range of $3.85 billion to $3.95 billion. The Diversified Manufacturing Services group is expected to increase by 2% sequentially. Enterprise & Infrastructure group is expected to be consistent with the first quarter, while our High Velocity group is expected to decline 13% sequentially.

Core operating income is estimated to be in the range of $160 million to $170 million. Core operating margin is expected to be in the range of 4.1% to 4.3% and core earnings per share in the range of $0.49 to $0.53 per diluted share.

Selling, General and administrative expenses is estimated to be approximately 3.2% of revenue. Research and development costs, $7 million in the quarter, intangibles, amortization is expected to be approximately $6 million and stock-based compensation $19 million with interest expense expected to be $26 million in the second fiscal quarter.

Based upon the current estimates of production, tax rate and core operating income is expected to be 20%. Inventory levels are expected to improve through the balance of the year as material constraints continue to abate. And we are targeting 8 turns as we move through the fiscal year.

Our capital expenditures are estimated to be $100 million in the second quarter, the majority of these expenditures associated with investments in Diversified Manufacturing Services segment and associated IT infrastructure.

At this point, I'll now ask you to turn the slide 12, and I'll hand the call over to Tim Main.

Thank you, Forbes. In terms of our operating margin performance and EBITDA, this is really a story about a business transformation and not simply a business recovery. We are focusing on customers, capabilities and costs in order to drive margins. Excellence in customer service and operational performance is really at the core of our business. Our scale, taking advantage of our scale as we approach being a $16 billion-a-year company and advancing our market share in targeted markets, and I'll talk more about that in a few moments.

Continuing our focus on differentiated services and capabilities, controlling our costs and improving our productivity, and of course, as we've driven EBITDA margins above 6% and should we meet the midpoint of our guidance in Q2, we will have three consecutive quarters of operating margins above 4% and EBITDA margins for the last couple of quarters at 6% or above, which lead our industry. And really that's driven to an expectation of significant free cash flow as we look at our business for the next couple of years.

Turn to page 13 please, slide 13. The business transformation and margin expansion has really improved the resiliency and sustainability of our business in our opinion. Now this chart depicts the profit derived from the three business areas for our entire customer base, and in fiscal 2006, almost half the profit of our company was derived from the High Velocity area and a smaller percentage was derived from Diversified Manufacturing Services.

In fiscal 2010 we really turned this right on its head and drove most of our profit from Diversified Manufacturing Services and a much smaller smaller percentage from High Velocity. We have seen this trend continue into fiscal Q1 of 2011, and our expectation is to continue to see progress both in fiscal oven and over the next three to four years.

Turning to slide 14, we had a lot of questions about the sustainability of our growth in Diversified Manufacturing Services, and just to provide a little bit of color on the size of this market, we see the market in terms of the cost of goods sold being about a $500 billion market. In Industrial and Clean Tech, we see about $120 billion market, really driven by increased outsourcing from industrials and a very strong global trend to renewable energy. In healthcare instrumentation, again, a significant market of $150 billion. We see healthcare industry consolidation, a very, very high level of interest in emerging markets, and increased outsourcing of healthcare devices and other goods and services driving growth in this area.

In specialized services, remember please that this includes Jabil Green Point, as well as our aftermarket services business. It is a very large market, very fragmented, a great deal of vertical integration with the OEMs as well, significant opportunities in aftermarket and advanced logistics services, and really a great growth engine in Jabil Green Point through applied innovation and leveraging the trend toward mobile Internet devices. So we think this is a significant market. It is a capacious market, more than adequate to fund our business growth over the next few years and accommodate other players in the market.

Turning to slide 15, please. We would like to note that Diversified Manufacturing Services growth is actually accelerating, and the law of large numbers hasn't yet diminished the growth trend in this area, our growth trend since 2006 to 2010 fiscal year, and we enjoyed a compound annual growth rate of 16% in these markets, and we look at the year-over-year growth rate fiscal Q1 2010 to fiscal Q1 2011, and we see a 46% year-over-year growth rate. I would also note that in fiscal 2010 that Diversified Manufacturing Services grew 26% year over year. So we are actually seeing an acceleration of growth in this area, driven by the trend to outsource Clean Tech renewable energy, the drive to localize supply chains to low cost regions as well as emerging economies, our share gains as our value proposition has improved, and the level of differentiated services that we provide become more valuable to the customer base in this area.

Turning to slide 16, to drill down a little bit down on activity both in the last quarter and where we expect margins to be in this business, our long-term growth target of 20% to 30%, again, we highlighted that the growth rate in year over year was above long-term expectations, and at this point I think growth in 2011 is expected to exceed the long-term targets. We do expect the operating margin in this business to remain in the long-term targeted range of 6% to 8%.

We are seeing new program growth with three major customers in Jabil Green Point and enjoying margin expansion through their applied innovation of materials and processes. In aftermarket services, we see the group focusing on globalization and customer and service expansion, including logistics.

In Industrial and Clean Tech, we expect growth to continue with an expanding customer base augmented by global trend to renewable energy. In healthcare and life sciences, we believe we are in early stages of an outsourcing trend, which we think will be powerful and will fund accelerating growth in healthcare with the foundation of Jabil's very strong value proposition and differentiation opportunities in this market. So very, very excited about what's happening here.

Turning to slide 17, Enterprise & Infrastructure actually outpaced on a year-over-year basis the long-term growth targets. Operating margins for the quarter remained in the 4% to 4.5% range. That's actually -- we are actually heartened by that given somewhat of a slowdown in enterprise spending, but margins were very good, and growth remains very strong here.

Infrastructure wins in emerging markets we think will be more important, increasingly important to the next year or two, and current trends would indicate that enterprise spending is stable, and we expect it to be stable to slightly improved in the balance of calendar 2011.

In High Velocity, we enjoyed good growth. Operating margins improved to 2.3%. That is within the long-term operating margin range of 2% to 2.5%. We still have some work to do in this area, but I think the business performance at this level is getting to more acceptable ranges, and we think in the balance of fiscal 2011 that we will be able to make additional progress. As we moved into 2012 and 2013, we should be able to accommodate the long-term operating margin range of 2% to 2.5%.

If you turn to slide 18, please. This is intended to help you use our long-term growth objectives to build your models for the balance of fiscal 2011 and to start to think about when Jabil might arrive at the targeted portfolio mix of 50% in Diversified Manufacturing Services and 25% roughly between Enterprise & Infrastructure and High Velocity. I can give you -- characterize when we think that might be able to -- that point of arrival.

So in the first half of 2011, presuming that we meet the midpoint of our Q2 guidance, we will run about $8 billion in revenue. If you apply the long-term growth targets to High Velocity, Enterprise & Infrastructure and the Diversified Manufacturing Services area to where we end up in the first half of 2011 to the second half, you'll arrive at a revenue stream of about $8.2 billion. That will result in a fiscal 2011 of $16.2 billion.

If you take that base and continue to apply the midpoint of the long-term growth targets to that $16.2 billion, you'll arrive at a point at which Diversified Manufacturing Services comprises 50% of our revenue stream somewhere in the timeframe of fiscal year 2014 to 2015. If Diversified Manufacturing Services grows at a faster rate, you might arrive a little bit earlier in that timeframe, and if it goes a little bit slower or we enjoy better growth in Enterprise & Infrastructure, then it might occur a little bit later. We think this is a very strong growth trend. We certainly expect the Company to be above a $20 billion-a-year company by that time and enjoy operating margins that are significantly above industry averages by that point.

Turning to page 19, slide 19 please, so what we are up to in 2011, it's not growth, it's sustainability. I really want to focus on continuous improvement of our customer service and operational performance. That is the core value of our business, and I think we are really focusing on customers now and driving organic growth.

We want to establish our growth trajectory in target markets consistent with the long-term plan. Our indications are what's happened in 2010 and what's happening so far in fiscal 2011, we are well on that path and very well-established to our long-term growth targets. We will continue to invest in differentiated services and capabilities to provide value to our customer base and to continue to divide differentiation in our models, which really expands our margins, and we are focused on attracting and developing the best people to drive consistent and sustainable performance over the long-term. We want to drive sustainable margin growth and asset efficiency and maintain our investment-grade balance sheet in a conservative capital structure. We feel like the indications are based on our Q1 performance expectations for the balance of the year, we should be able to accomplish these objectives and keep the Company on the path that we've articulated over the last couple of conference calls.

Great. Thank you, Tim. Operator, we are ready to begin the question and answer period, please.

(Operator Instructions) Lou Miscioscia, Collins Stewart.

Hey, guys. Nice quarter. I guess we could just drill a little bit more down down to the margin improvement both on the High Velocity and also in the BMS area as that fell off a little bit. Obviously, you just mentioned that it had a little bit to do with seasonal demand and your own performance. But now that you just hit 2.3%, and your range is basically a little bit above the midpoint of the range. Is it likely to then stay at that level going out for the next couple of quarters?

It's the seasonally strongest quarter. So the expectations wouldn't be that it stays at 2.3%. I think Forbes mentioned that we had a reduction in force that actually took some -- reduction in force expenses in the Diversified Manufacturing Services area, and if we had added that back, the operating margins would be 7.1%. So really no diminishing margin performance in Diversified Manufacturing Services that concern us. We look at the balance of the year.

If you take the midpoint of our fiscal Q2 guidance, we will run around a 4.3% operating margin for the first half. Looking at the second half of the year, we would expect the overall corporate margins to expand by approximately 20 basis points. Now that gets you a year of 4.4% to 4.5% operating margin for the year.

Okay. That's helpful. Drilling down a little bit into medical, could you maybe just go into what type of medical you're really expanding out? Is there any disposable in there, or is it more the bigger products or the handhelds and just what you are really trying to attack?

Sure. We do business with the three largest healthcare companies in the world. We are great growth from midtier companies in imaging and diagnostic care. I think long-term you will see disposables become a part of our business. Right now, in the current business, it's not a major factor. But we certainly have the capabilities through what comes out of our High Velocity area and the kind of capabilities that Jabil Green Point have to really help customers and collaborate with customers to develop some very interesting products that, for instance, portable ultrasound machines would be taken into remote villages to provide prenatal care to women who don't have access to a good healthcare, and that leverages our capabilities from Green Point and High Velocity as well as our healthcare business.

So we are really focusing on the core of the market first. We think we do business with eight of the top 10 healthcare providers in the world, and if we really just continue to expand and focus on organic growth, then we think certainly we have probably the most significant in terms of percentage growth rate the most significant opportunity for the Company.

Okay. Great. Thanks. Good luck on the new year.

Steven Fox, CLSA.

Hi, good afternoon. Just, Tim, on some of the margin targets by segment, can you talk about especially with the DMS business the difference between, say, doing the high end of your margin target, the 6% versus doing the 8%, is it all related to mix, or is there anything else we should think of as we try to figure out that key driver going forward?

Well, there's a couple of things to just keep in mind. One is that we are really focused on growth in that area, more so than struggling to put up an incremental 10 basis points of margin. So, our people in that area are really incented to grow the business.

Secondly, it will be a factor of mix and where we are in the cycle. Some parts of Diversified Manufacturing Services, a little better margin than others, more highly differentiated. It kind of depends on where we lean into it. We could run as high as 8 depending on mix, depending on what areas of that business grow faster. We would accept 6 if it were in areas that we were targeting, and we felt we could enjoy some accelerated growth.

(multiple speakers). And just a follow-up, given how fast that business is growing, can you sort of talk about capital spending plans for that? I think you mentioned $100 million is largely dominated by the DMS business for this quarter. But should we expect other capital investments maybe even more sizable than we are seeing this quarter in the next couple of quarters to support that growth?

You'll definitely see the voluntary capital move into the Diversified Manufacturing Services area. I think that is very consistent and aligns well with the Company's internal strategic plan and the incentive plans and everything else that we do here. If we make acquisitions, it is much more likely to be in Diversified Manufacturing Services than the other areas.

Brian Alexander, Raymond James.

Thanks. Nice quarter. Tim, could you talk about the explosive growth you saw in specialized services sequentially in the November quarter? How much of that was Green Point versus aftermarket? I think historically aftermarket doesn't grow that much sequentially, so it would seem a lot of that was Green Point. And you talked about three major customers within that. Is it fair to assume all worked within this smart phone segment, or are you starting to expand outside of mobility within Green Point? And then I have a follow-up on margins.

Well, we are starting to expand outside of mobility, but the present growth engine is built around mobile Internet devices and the high end of the market, and we think we have -- they do business with all the major players in the world, but three major customers are driving the highest percentage of the gross.

And I think it is appropriate to think about aftermarket services growing at a slower rate than Jabil Green Point is right now. So, the growth in the last quarter was dominated by that area. But we think these are both attractive opportunities, and we expect to see significant growth this year out of aftermarket services as well.

So I guess the follow-up would be on margins for Diversified Manufacturing if you back out the chart you referenced flat sequentially, and it would appear that the mix within that, within DMS, was much more favorable given that it seems like Green Point had a very strong quarter. And I think in the past you have talked about double-digit operating margin, low double-digits for that part of your business. So if you just talked about why margins were flat sequentially in DMS given the mix appear to be more favorable, thanks.

Yes, I don't think the mix was really more favorable. I think you might be referencing conversations about double-digit operating margins that maybe peak at the absolute high end of the range of any kind of sustainable activity in that business. We're really pleased with the margin performance in Diversified Manufacturing Services and continue to enjoy significant growth there.

And then, Forbes, the follow-up on the balance sheet with AR coming down quite a bit and prepaids going up a bit, can you just walk us through that?

Yes, that relates to some accounting changes that were adopted at the beginning of our fiscal year. That's associated with accounts receivable securitization. In your accounting literature, (inaudible) interest in accounts receivable located in the prepaids rather than accounts receivable.

Okay. So DSOs going forward should be kind of in the range of what we just saw this quarter?

That's correct, yes.

Amit Daryanani, RBC Capital Markets.

Thanks a lot. Just a question on the sales cycle. Now I suspect the sales cycle is longer on the Diversified segment versus the other two divisions. So as that segment continues to outgrow with what you guys have outlined, how should we think about the inventory turn in the sales cycle for the Company for the next two or three years?

You know, as we intimidated last quarter and in my prepared here as well, it is really how we think about it so that it is about an 8 turn business. You're absolutely correct. You know, the investment in terms of inventory for the Diversified Manufacturing Services are particularly up. A, (inaudible) instrumentation and healthcare and industrial (inaudible) connectivity is much greater than perhaps the High Velocity in a private infrastructure area.

So, as that goes, I think we still have opportunity to target 8 turns. We still have some work to do, and other than that segment currently, and we start to see that improve as material constraints (inaudible) as we move into Q2, Q3 and beyond.

But certainly an 8-turn model, we certainly target and believe that is very achievable. And if you do that, there is the terms that we have. You know, you are still targeting the sales cycle in the mid teens, which will really support strong free cash flow as we move forward here.

Fair enough. That's helpful. And then just when you look at the $500 billion TAM on the diversified that you guys are talking about and that you guys are definitely seeing success there. But I'm curious in instance where you don't win contracts in these segments, what is that typically due to, and what do you think makes Jabil stand out worse than your peers in that segment?

What makes us stand out better than our peers?

Yes.

Okay. So we win business in this area because of our scale, access to emerging economies, differentiated services, our capabilities and having a very significant headstart on much of the market. This area of our business is bigger than the segments of many players in our industry, and we have been doing this since 2002. So getting better at we do, hiring better people, providing better capabilities, integrating our aftermarket services, what we do in Jabil Green Point with our core manufacturing and order fulfillment capabilities are all very attractive in a significantly differentiated value proposition for customers.

We are engaging more and more in product development, industrialization and helping customers bring these products to market, not only in developed areas of the world like Europe and North America but also in places like China, India and the rest of the developing world. So, this is the key area.

Why do we lose business? There is some good competition out there. There are some companies that do well in this area, and we certainly don't aspire to win every single opportunity that comes along the transom. Sometimes it's because we are not local enough or we haven't -- don't have the right product development skills. There's a whole host of reasons. But I can tell you that our ability to close business in this area and the percentage of businesses that we win, the recording has been on a steady increase.

Just a final follow-up. The 20% to 30% growth in the segment, is that predicated on any acquisitions based on what you guys see?

The expectation is that is organic growth.

Craig Hettenbach, Goldman Sachs.

Yes, thank you. Tim, last quarter you mentioned that Jabil Green Point revenue could potentially double in fiscal 2011. Do you still feel comfortable with that, and any update in terms of some of the yields and margins as those programs continue to ramp?

Sure. I still feel comfortable with the statement that it could as much as double in fiscal 2011, and we are very pleased with the level of performance in the business today. There is always a culture of continuous improvement. There was always effort to improve yields and reduce costs, but we are certainly at a level now where the yields and throughput and predictability of the business is such that we are at targeted levels.

If I can follow-up, just more broadly on IT spending based on forecasts from customers and what you're hearing from them as we go into 2011, can you talk about what markets you expect to lead spending, and any market areas where you might see those markets lag?

I think areas that we think for 2011 will be particularly good for us are infrastructure and storage areas. I think enterprise spending is stable, but enterprise spending was so strong in 2010 that there is just -- it is unrealistic to expect those types of growth rates to continue on a long-term basis. So stability in enterprise spending and then infrastructure and storage I think will be better for us than other areas. It really provides most of the growth for the balance of the year.

Great. If I can just ask just one more, Forbes, on inventory. It sounds like the component is coming into more equilibrium in terms of availability, but any thoughts there and typically in a February quarter internally what you would do with internal inventory?

Yes, material constraints have abated somewhat as we have moved through calendar 2010. There are still one or two spots where they have become challenging, and we would expect that to abate by the time we get to the end of the second fiscal quarter. But, as we move through our second quarter, we should see start to see some of that inventory liquidating and processing through the revenue stream. So you should continue to see improvement as we move through fiscal Q2.

Amitabh Passi, UBS.

Hi, thank you. Can you hear me? (multiple speakers) Forbes, first question for you. What would it take to get to the 8 turns that you have been referencing as a target? And then given the fact that your use in cash in the first fiscal quarter, CapEx appears to be trending slightly higher than expectations. Do you still feel comfortable with your free cash flow goal of 25% to 35% of what could be about $1 billion in EBITDA this year?

Let me take the first portion of the question. (inaudible) continued blocking and tackling on our partisan organization, you know, and some level of lessening volatility as you move through the back half of the year in terms of High Velocity spreading. We have operational plans and big toolsets and such like in place. So, you know it's a case of just you can add two, three or four days as we move forward end of year, particularly as we see continued expansion in Diversified Manufacturing Services.

So, I don't think it's any fundamental change in the way we operate, but it is more basic blocking and tackling and ensuring we get our arms around the volatility that does miss in the High Velocity segment, you know, where that is more consumer facing.

The second part of your question referred to cash flows and capital expenditure levels. So yes, with the guidance we have given, that is $200 million. The previous indication I've given was somewhere in the region of $300 to $400 million. So, we are going to be pacing at the higher end of that, but with that we're seeing stronger revenue growth, $100 million additional in the first quarter here, and our guidance looking forward is to bust into Q2 and beyond.

Even modeling that with the cash cycle in the mid-teens, I still think there's a really good opportunity. You know, we should see some very strong free cash flow next quarter, even with the investments in capital as we see liquidation in terms of our accounts receivable and inventory to which I referred earlier.

So, in terms of overall targets that we put out here last quarter, yes, I think they are on an overall basis very comfortable. But I would caution is target levels as we move through the balance of the year. Once we saw revenue growth continuing to be robust or even more robust than the midpoint of our long-term targets, then clearly, yes, we need to invest in further working capital. And, as we sit today, yes, I'm comfortable.

Got it, and then just a quick follow-up. With the seasonality in your High Velocity Systems, you know, with the segment being down 13%, do you still expect it to be profitable in the February quarter?

Absolutely, absolutely. And while it sits down sequentially, you know, it's back to levels it was in Q4. Our Q4 margin from memory was about 1.25%. So with our continued operational efficiency, I certainly believe there is opportunity to produce at least those types of return, if not enough north of that.

Okay. If I could just clarify one final point, I think last quarter when you reported inventories, you had netted $150 million in deposits, but then I think you grossed that back up in the 10-K. So the $2.158 billion reported this quarter, I just want to confirm the comparable figure for Q4 was $2.094 billion, so just about a $50 million or $60 million increase?

That's correct. It's apples for apples. (inaudible) deposits than accrued expenses.

[Juan Semohan], Bank of America.

Thank you. Tim, very strong Green Point performance here in the quarter. Can you perhaps share how long the average programs are in this business and how many more quarters of sequential growth do you see at Green Point?

Average what? I didn't catch the (multiple speakers).

Average length of the programs.

Oh, average length of the programs. Exterior of the products has a little bit longer life. So, you know, that this significant range anywhere from nine months to a couple of years in terms of product lifecycles. There is significant touring that goes into these things and that type of thing.

But look, I expect Jabil Green Point to continue to grow. It's a part of Diversified Manufacturing Services. I don't want investors or anybody really to over-emphasize the importance of Jabil Green Point to the Company's results currently because we are getting great results out of healthcare and instrumentation and industry and Clean Tech. These are very strong growth engines with excellent performance and strong margins as well. So we're really happy with the full portfolio of businesses that we are engaged in in those areas. And I think Jabil Green Point right now they are on a roll. They're expanding their market share. They've got great innovation, and I would expect for the foreseeable future in the next few years for them to continue to grow.

Okay. Thanks a lot. And then based on the annual $16.2 billion revenue scenario and improving mix, you mentioned you can be in the 4.4% to 4.5% operating margin range. Even if we take a really conservative approach and slow bake in some slowdown, with all the focus that you put in on costs and mix initiators, would you say that from a downside scenario standpoint, the floor on margins is going to be a lot higher this time around. Would that be a fair statement?

It's a fair statement, but you can't -- I would refer you to our Safe Harbor Statement and the Risk Factors on our 10-K. I'm not trying to establish a floor on margins. I think if things go reasonably according to plan plus or minus a few percentage points, we will continue to run it at well into the 4% operating margin range, and as we look into 2013, 2014, 2015, we intend to continue to expand our margins. That margin expansion will come slower than its come in the last couple of years, but we think this business can be very profitable. And if we continue to expand our margins and control capital efficiency, then there's no reason return on invested capital can't get into the 30s. And at that level of free cash flow, EBITDA and ROIC, we think this is -- and the growth that we have as a business -- we think it's a very attractive company to invest in and participate with.

Steve O'Brien, JPMorgan.

Hi, thanks for taking my question. Looking out at the longer-term margin sort of goal and forecast for the E&I segment, this quarter you would be at the very high end of that range. Can you expand a little bit on sort of the conservatism baked into the outlook for those margins what gives you pause from the level they are at today?

There's not really any pause. There are just natural changes that happen quarter to quarter depending on levels of production and activity in that area, how much material content is running through the revenue stream and how much order performance there is, how many new programs are launching at once in any given quarter. So I think investors should not -- we need to start thinking about our business as being diversified, about our business being more resilient to change, about our business not being about a couple of 10% customers; it is not all about those customers. And we will see 20 or 30 basis point changes in operating margins quarter to quarter. And as long as those margins are within the targeted ranges and we don't see any significant events that would impact our long-term expectations, then we find margin performance in those regions to be acceptable.

You know, if you take the low end of that targeted margin range and our targeted 50% Diversified Manufacturing Services and 25% Enterprise & Infrastructure and High Velocity, at the low end of the 6% to 8% for Diversified Manufacturing Services and 2% to 2.5% for High Velocity and 4% to 4.5% for Enterprise & Infrastructure, you have got a business that runs with 4.5% operating margin. You know, at the high end, you're in the 5s. So we think this is a business that can run at a 4.5% operating margin long-term and better, and I think as we continue to work on our costs, our capabilities and expand our customer base and really focus on execution, then we will see operating margins move much closer to five long-term than four.

Great. Thanks for that, Tim. And if I could expand on that a little bit, looking at sort of the customer concentration figures over the last two or three years, I would say that it's not overly evident to me that there is a diversification in terms of customers contributing 90% of revenue or how much the top 10 customers are contributing. When do the broader customer base for healthcare and industrial and instrumentation sort of, I guess, dilute the concentration from some of the traditional customers?

It's happening now, and that's -- I would refer you back to slide 13 when you look at profit concentration versus revenue concentration. So the historical look at our business from the analyst community has been look at the revenue side and who are the 10% customers, and that really drives profitability. That's really not the case.

So you are right in pointing out that our revenue concentration is near all-time lows as we would expect to continue to drop where it's 59% of our revenue derived from the top 10 customers. But if you refer to slide 13, when we reference healthcare, over 50% or roughly 50% of the profit is derived from Diversified Manufacturing Services, which is very well diversified across 50 different customers. It's very well diversified area and growing fast. So you talk about resiliency, reduced concentration and sustainability, we're really looking at the earnings engine more than the revenue engine.

Now those 10% customers are extremely important to us. We value them, we work on them daily, and we want to continue to provide them the best services available in the world. But in terms of the resiliency and sustainability of our business and the profit diversity in our business, that's already evident in the numbers.

I mean that is a real -- in fiscal 2010, that's what reality looks like. Half of our profit comes from Diversified Manufacturing Services. And there is not a 10% customer in that sector.

Thank you, Tim. Thanks a lot for that, and great use of the word capacious earlier.

Okay. The word for today is capacious.

Jim Suva, Citigroup.

Great. Thank you and congratulations on great results, outlook and turnaround. A question, Tim, first to Tim and then a follow-up on a different topic for Forbes. But, Tim, if I remember right, it was six months ago or so you guys implemented an additional amount of capital expenditures for ramping up some programs. I think that might have been Green Point related. Can you remind us if that was the case, and have this revenue associated with the CapEx expenditures fully ramped up? Are we half way, and if we are half way, do you have contracts for that remaining part, or are we actually to the level of where we should be for full optimization?

And then for Forbes, can you talk a little bit about the tax rate? Typically I expect a company to kind of give their guidance in the first quarter to equal kind of the full-year guidance, and first quarter, I believe, came in around 17%, and you are guiding to 20%. Did something help out Q1, or why wouldn't for the full year we be looking at 17% the entire year? Thank you and congratulations.

Thanks, Jim. The answer to the first question is simply yes. We have fully ramped up, and the revenue was at targeted levels. The capital investment was made in Q2 and Q3 of fiscal 2010.

So, Forbes?

(inaudible) yes, it was -- we forecasted 20% for the year and the quarter coming into the fiscal year. It was really driven by earnings mix. We have a number of tax holidays, for example, in Malaysia and a number of other locations. And in this particular quarter, it was all driven by a reduction by the earnings mix. As we look across at the tax rate into the second fiscal quarter beyond given the data (inaudible), I would suggest 20% as we move forward.

So it really depends on where the sources of revenue are coming from. As we move into Q2, it looks as though it's going to be nearer 20% than it is the 17%.

Great. And, Tim, on the CapEx, if we are fully ramped at the diversified Green Point area, should we then expect $100 million to be a little bit light for CapEx if you are talking about potentially doubling this business and the growth there?

No, everything -- that's a full CapEx guidance that Forbes talked about, and I think the expectation obviously we are going to be at the high end of the original expectation, which was $300 million to $400 million. But I think that's an indication that business trends are very strong for us.

Great. Congratulations, again, to you and your team for a great results outlook and the turnaround.

You bet. Thank you.

Sean Hannan, Needham & Co.

Yes, good evening. If you folks can provide perhaps a little bit of commentary around what you have seen in customer forecasts, at least the degree to which you have seen some stability from your customers over the last few months and perhaps maybe going back into the summer?

And then as a kind of Part B to that, the degree to which you have actually seen anything tweaked down versus the stability is up -- and I realize some of this has been covered to an extent in some of your prior commentary tonight -- but if we can just summarize the picture, it would be helpful.

Sure. We can't get into specific customer forecasts, and we can provide you some general color on how the last 12 months has unfolded and how we think about the next 12-month period.

So when the business recovery started after our trough quarter in the third quarter of 2009, we had a very, very strong IT spend that drove a lot of the initial recovery. That created a very, very constrained material marketplace. Consumer spending in the emerging economies -- China, India and other areas of the world -- continue to be very, very hot. So, there was a significant expansion of lead times for individual components and very, very robust spending in calendar Q2 and Q3 of 2010.

You know, ultimately some of those trends slowed down as the US -- I mean this is very well covered. GDP growth went from 4% or 5% down to 1.7% or 2%, and maybe that's been revised back up from 2%. But some of that IT spending slowed down a bit. Lead times -- component manufacturers have put capacity in place. As a result of really those two dynamics, lead times for individual components have declined, which makes it actually easier for us to manage inventory and easier for us to manage throughput to customers.

We do still see some component shortages for telecommunications customers and some industrial customers, but overall the component marketplace has been easing as Forbes outlined.

At this point, in terms of US spending, enterprise spending looks stable. International spending looks very strong, and other areas of enterprise infrastructure are pretty robust. Very good secular trends backdrop for storage, good spend in terms of building wireless infrastructure out in emerging economies. So Enterprise & Infrastructure appears to be in good shape. Spending in industrial, Clean Tech, healthcare, instrumentation, Jabil Green Point and aftermarket services all seem to be consistently positive.

And then at High Velocity, I think things probably went a little bit better than people thought this Christmas season, and we have several customers there that have done a bit better than originally planned and are looking forward to a pretty good 2011 relative to where expectations were a few months ago.

I don't think it's going to blow the doors off of anybody. I don't think you are sitting on some miraculous improvement in -- I hope we are. I mean I hope we see that in the headlines. But we certainly don't see any indications that we are at some kind of steep inflection point that is going to be followed by 5% GDP growth in the United States for the next couple quarters. But certainly very stable in Enterprise & Infrastructure, a little bit better than originally planned in High Velocity, and -- wow -- really great growth trends in Diversified Manufacturing Services. That's driven by, I think, part of the focus, by the trend to outsource, by the other trends that we have already mentioned, and we see the overall business there continuing to be robust for the next few years.

That's helpful, Tim. Just on the back of those comments, when you look at your new segmentation and when you look at the nature of the customers and the contracts, etc. that you have underlying each of those segments, is there a way if you can characterize for us where in your mind is the level of visibility for the customer base or those contracts for those segments? Are there -- when you look at GMS or High Velocity and so forth, how can you communicate to us where you see and how you see levels of visibility and if this is based on the nature of the customer itself, the contracts or the nature of the industry in which they compete?

Let me just -- I will characterize it in terms of confidence more so than visibility because we always have visibility. What we can't tell how much of that visibility will ultimately be purchased. So we always get forecasts. It is a matter of what the confidence level in those forecasts are and how closely sell-through rates match the initial forecast. And I would say that in the High Velocity area, absolutely the highest data revenue area that we have in the business that we get the visibility, but it's the most vulnerable to changes in those forecasts and throughput relative to the other two segments.

Having said that, I think customers in that area have a higher level of confidence than they have had in the last year. So that I would regard that as something positive for people to take away.

In Enterprise & Infrastructure, generally the late summer, early fall slowdown took a little wind out of the sails of customers in that area. But I think people see a fairly stable demand environment and depending on the customer and the product actually see good things on the horizon.

In Diversified Manufacturing Services, visibility has been good, remains good and is very robust.

Matt Sheerin, Stifel Nicolaus.

Yes. Hi. Good afternoon. So, could you just talk about the High Velocity business being a little bit better than you thought, and I know you are really careful in terms of managing the margins in that business. And as you strive to keep in that range of 2.5% or so, would we expect to see any big swings in customers as you try to be disciplined in terms of pricing, profitability and returns metrics?

I wouldn't expect to see any big swings. To the extent that relationships need to be disengaged or areas of High Velocity need to be deemphasized and worked out over time, that tends to take place over a longer time period.

You know, contrary to the belief system that's been out there for a while, these programs are not easy to move quarter to quarter. The switching costs are high. Certainly High Velocity that has, again, the highest data in the business areas that we are engaged in. But even if the products in that area, you know, they are difficult to move, and to the extent that we needed to move away from any business area, it would happen over -- would be managed methodically over a long period of time. So we wouldn't expect to see any major disruptions.

I think about the displays business as a guide to how we manage those conditions in the High Velocity area. Roughly 2006 we did over $1 billion in TV sets, displays, and we managed that down to $300 million, $400 million. At the same time, we have grown the business and expanded our margins.

So, that is why we don't talk about products as much in High Velocity. This is a customer-oriented business, not a product-oriented business. We're very selective about who we want to do business in that area. We want the relationship in High Velocity to be strategically based. In other words, the customer values the services and capabilities that Jabil has on a strategic basis. We don't participate in quarterly bids for business with massive losses or gains of business the way you might see in the PC or notebook market. So that's really what we are up to in that area.

Okay. Great. That's helpful. And just a quick question. Did you have any 10% customers in the quarter?

Yes, we had two.

Two, and is it the same customers that have been 10% as in the past?

Yes, it is. That is correct.

Okay. Thanks a lot.

Shawn Harrison, Longbow Research.

Hi. Good evening, everyone. Just a brief follow-up to Matt's question. Tim, it sounds as if you're kind of set in terms of business you want to manage down across the portfolio right now. There's not, at least on a sequential basis going forward, any incremental headwind that we should think about over, say, the rest of or throughout calendar 2011. Is that a correct statement?

That's a correct statement. The caution is that is the highest data area we are engaged in. Thankfully it's also the lowest profit area. (inaudible) headwinds. It doesn't have the type of effect that you might think. So you really need to calibrate your expectations there, but we see no major disruptions or no major headwinds that haven't been anticipated in that area.

Gotcha. Within the Enterprise business, there's nothing there either that you are looking to manage down?

No.

Then my follow-up question, you know, I guess any incremental restructuring we should anticipate that Jabil would run through the P&L over the next six to 12 months similar to what happened in Japan?

Well, keep in mind that Japan was taken through cost of goods sold. So that's baked into the 4.5% -- that is after -- the 4.5% margin is after that reduction in force. And the go forward plan of the Company is to make modest changes to our infrastructure on the same basis.

And then continue to run it through the P&L?

That's correct.

Okay. Thank you very much, and congratulations on the quarter.

Alex Blanton, Ingalls & Snyder.

Well, I will try to be brief here, but thanks for going over the hour. I had a question on the margins potential, but I think you answered it. You said that margins could be above the industry average in 2014, and I wanted to ask, what do you think that industry average might be at that point?

Our margins are above industry averages now.

Yes, I know.

I think the industry has got an opportunity to continue to expand margins over the next three or four years. I don't think that's just a Jabil condition. I talked about at the low end, if you just extend the targeted portfolio mix against the low end of what our targeted margin structure is, that drives about a 4.5% operating margin. And for large globally scaled EMS providers, I think that would lead the industry, but we will see. I think the major players in this business, it is a big industry, there is ample opportunity, and I think all the major players, good companies in our industry, will have a good opportunity to expand margins.

Typically you ought to be more efficient, not having big changes, big pickup people in the customer base. I think China only as the play for low cost manufacturing, and that card is kind of played out. I think the guys that diversified global footprints in the diversified global customer base will be able to continue to drive and refine services. I think with a little bit more consolidation, that would make the neighborhood even safer to live in. And I think there is good margin expansion opportunity for everybody.

Well, that's going to lead into my follow-up question, which is this. Are we entering a new time period, new era, let's say, for this business? We went through the 1990s, 1990 to 2000, the initial thrust, the industry grew 25% a year for 10 years. And some companies grew 50% a year because they were expanding their share. And then we went through 10 years of what looks like consolidation in which there were new competitors came in, took some of the business, the margins went down. Then there was some mergers and acquisitions tightening up a little bit, but margins are now on the upswing. Are we entering a new 10-year period in which things settle down, margins go up, and people outsource more, and the industry grows at not the 25% a year but something well above GDP?

I think you're absolutely looking at that kind of condition for our industry. I think you want to stick with best-of-breed companies and stick to the major players since they think you need to be globally -- you need to have adequate scale. The level of investment in IT infrastructure today is daunting. So the experience levels, the capabilities, all that stuff is very important in the customer base, and they can be choosy.

Now the good thing is that the market is huge now. It's big. I mean when I was joining the Company in 1987, it was probably a $500 million a year market, and now it's $200 billion, and there are great opportunities. The ODMs can support notebooks and PCs and kill each other over margins and bid on the next quarter of 20 million notebooks, while we can pursue differentiation in areas that it is really services based. So I think you have got a condition where it is going to be a breed of companies that are more product-focused and commodity manufacturing-focused, and then you will have a breed of companies that are more services-focused and customers and EMS providers like Jabil really looking for a partnering relationship, collaborating on global production strategies, and that is an opportunity for a group of companies to really prosper over the next five to 10 years.

I think it will be very unlike the last five years. I mean you have to remember that we've just been through a couple of years horrible recession, and that has taken a lot of rationalization on the part of companies in the space and that kind of thing. I think the market is big enough and the companies are mature enough now that we can get back to really driving quality growth, quality earnings and good cash flow. I think it's a different era for the industry.

Great. Thank you very much, everyone, for participating on the call today, and happy holidays.

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