捷普科技 (JBL) 2012 Q3 法說會逐字稿

Good afternoon. My name is Corinne, and I will be your conference operator today. At this time, I would like to welcome everyone to the Jabil 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. I would now like to turn the call over to your host, Beth Walters. Ma'am, you may begin.

Thank you very much. Welcome, everyone, to our third quarter of 2012 earnings call. Joining me today are President and CEO, Timothy 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.

Our third quarter press release and corresponding webcast with slides are also available on our website. In these slides, you will find the financial information that we cover during the call. We ask that you follow the presentation with the slides on the website beginning with slide 2, our forward-looking statement. During this conference call, we will be making forward-looking statements including those regarding the anticipated outlook for our business, our currently expected fourth quarter of fiscal 2012 net revenue and earnings results, our long-term outlook for our Company, and improvements in our operational efficiencies and financial performance.

These statements are based on current expectations, forecasts and assumptions involving risks and uncertainties that could cause actual outcomes and results to differ materially. An extensive list of these risks and uncertainties are identified in our annual report on Form 10-K for the fiscal year ended August 31, 2011, 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 our third quarter results, highlights and comments from Forbes Alexander, as well as guidance on our fourth fiscal quarter of 2012. Tim Main will follow with macro environment and Jabil specific comments about our performance, our model and our current outlook. We will then open it up to questions from call attendees. I will now turn the call over to Forbes.

Thank you, Beth. Hello, everyone. I ask you to refer to slide 3. Our net revenue for the third quarter was $4.25 billion, an increase of 0.5% on a year-over-year basis. GAAP operating income was $156.6 million or 3.7% of revenue, which compares to $152.5 million of GAAP operating income on revenues of $4.28 billion or 3.6% for the same period the prior year. Core operating income excluding amortization of intangibles, stock-based compensation, and a distressed customer charge increased 7.1% to $190.3 million, and represents 4.5% of revenue. This compared to $177.8 million, or 4.2% for the same period in the prior year. GAAP diluted earnings per share for the third quarter were $0.48, an increase of 2.1% over the prior year. Core diluted earnings per share were $0.64, an increase of 10.3% over the prior year.

Please note that our GAAP operating results were negatively impacted by $10.1 million during the quarter, as a result of a distressed customer charge taken associated with the solar industry. The solar industry today operates in a difficult environment, with much uncertainty and continuing trade disputes with China. We are at significantly lower levels of production than we were in fiscal '11. We anticipate volumes in fiscal '13 to be somewhat similar. And although the demand environment is not robust, we do not anticipate any further charges.

Now I would ask you to refer to slide 4 for the discussion of our segments. In the third quarter, our Diversified Manufacturing Services segment grew 22% on a year-over-year basis, driven largely by strength in our Specialized Services sector. Revenue was approximately $1.9 billion, representing 44% of total Company revenue. Core operating income expanded 70 basis points to 6.5% of revenue. Revenue in the Enterprise and Infrastructure segment decreased 4% on a year-over-year basis, while exceeding our expectations in the quarter. The quarter saw strength in Storage, due to a large program ramp as a result of customer consolidation activity in our favor. Revenue was approximately $1.3 billion, representing 31% of total Company revenue. Core operating income for the segment expanded by 50 basis points sequentially to 2.2% of revenue.

The High Velocity segment decreased 20% on a year-over-year basis, driven by continued weakness in handset volumes. Revenue was $1.1 billion, representing 25% of total Company revenue in the quarter. Excluding our handset business, High Velocity is performing very well, as evidenced by year-over-year gains in set-top box, point of sale, printing and automotive. As a result of this mix, core operating income for the segment remained above our long-term expectations at 3.7% of revenue. During the quarter, there was only one 10% customer, residing in our Diversified Manufacturing Services segment, while our top 10 customers comprised 68.2%.

I would now ask you to refer to slide 5, while I review some of our balance sheet and cash metrics. We are pleased with our working capital and operating cash flow performance in the quarter. Sales cycle improved by 3 days sequentially. Inventory turns remained at 7, while cash flow generated from operations was $186 million. We ended the quarter with cash balances of $742 million. During the quarter, we repurchased some 1.5 million shares, with a value of approximately $30 million. There was no impact to reported earnings per share in the quarter, as a result of these repurchases, and $30 million remains outstanding on our current stock repurchase program.

EBITDA in the quarter expanded to $275 million or 6.5% of revenue, the highest level since the fourth fiscal quarter of 2005. Our net capital expenditures during the quarter were approximately $108 million. As I indicated on our March earnings call, we continue to expect capital expenditure levels for the second half of this fiscal year to be approximately $320 million. Majority of these expenditures are targeted within our Diversified Manufacturing Services segment, specifically associated with rapidly expanding capacity in our specialized services sector. As we exit the year, we shall have doubled our square footage in Wuxi, China, and have recently signed an agreement to establish a site in Chengdu, China with ultimate available capacity up to the size of our Wuxi operations. The first phase of this expansion is scheduled to be completed during our first fiscal quarter of 2013.

I would now ask you to turn to slide 6,for summary of the quarter's performance. We're pleased with the operating performance in our third fiscal quarter. Core operating margin performance was 4.5%, the midpoint of our guidance, while revenues were below the midpoint of the range provided. Core operating income expanded 30 basis points, on both a sequential and year-over-year basis, while EBITDA expanded 30 basis points sequentially, and 50 basis points on a year-over-year basis. Our return on invested capital, calculated on a GAAP net income basis was 19%, or 24% on a core basis.

Finally, I would ask you to refer to slides 8 and 9. I would like to discuss our fourth quarter guidance. We expect revenue in our fourth fiscal quarter to be in the range of $4.1 billion to $4.35 billion. Core operating income is estimated to be in the range of $170 million to $200 million, and core operating margin in the range of 4.1% to 4.6%. Our core -- our earnings per share are expected to be in the range of $0.54 to $0.66 per diluted share, and GAAP earnings per share are expected to be in the range of $0.43 to $0.55 per diluted share. This is based upon a diluted share count of approximately 212 million shares. Based upon the current estimates of production, the tax rate on core operating income is expected to be in the low to mid 20% range for the fourth fiscal quarter, reflecting a higher proportion of anticipated income from higher tax rate geographies.

Turning to our segments and year-on-year performance, the Diversified Manufacturing Services segment is expected to increase 17%. The Enterprise and Infrastructure segment is expected to decline 5%. And finally, our High Velocity segment is expected to decline 22% on a year-over-year basis. Thank you, and I would now like to hand the call over to Tim Main.

Thanks, Forbes. I'll make a few comments on present conditions, and then longer-term perspective. In the short-term, we are managing through a period with many changes happening simultaneously. It is well-documented that our mobility customer in the High Velocity sector has been under duress, as they have grappled with declining sales and leadership changes while making preparations for critical launch of an important new product platform. This customer has publicly articulated their intent to drive higher performance, and derive greater efficiency in their supply chain through consolidation with fewer high capability suppliers. Jabil has been selected as a go-forward partner, and we expect to consolidate production regionally in Mexico and Hungary over the course of the next quarter or two. Future levels of production will be highly dependent on a number of factors within and outside of our control. However, we expect our total revenue with this customer will remain below the 10% level in our fourth fiscal quarter of 2012, and throughout fiscal 2013.

In order to support a number of new customers and rising demand, we are in the midst of a large-scale capacity expansion for Diversified Manufacturing Services. In addition to expanding existing sites, we have also broken ground on a new site in Chengdu, China. This new site is capable of supporting up to 2 million square feet of manufacturing capacity, intended for our Specialized Services and other EMS business areas. Production from the new site is expected to commence by the end of this calendar year.

Margins in our Enterprise Infrastructure sector expanded 50 basis points sequentially, as revenue increased 8%. While we expect revenue to be stable to slightly higher sequentially for the next several quarters, our expectations for growth are more muted now than 90 days ago. Counterbalancing lackluster end markets, we have earned additional market share with several customers, and experienced inefficiencies ramping production on incoming transfers over the course of our third fiscal quarter. These inefficiencies are expected to continue through at least part of F Q4, before reaching mature production efficiencies in F Q1 of '13. In addition to ramping up new programs, we will look to take an appropriate level of cost reduction actions, in order to return margins to our long-term targeted range.

Excluding our mobility customer in High Velocity, the balance of our High Velocity business is actually growing at acceptable return levels. Excluding the aforementioned mobility customer, we expect the balance of High Velocity revenue and income to increase over 15% in FY '12 over FY '11. While High Velocity is not a target growth area for Jabil, it does underscore that Jabil continues to be a cost-effective, trustworthy name for attractive customers in this business area. We are fast, flexible and competitive, and we have the ability to compete in more ways and in more theaters than most of our competitors.

Integration of our Telmar acquisition continues in our Aftermarket Services business. Additionally, AMS is innovating a number of new multi-country, multi-layer service strategies that are generating solid organic growth. The Telmar integration and the launch of these new service offerings for specific customers has had a negative impact on profit levels in F Q3, and is expected to show modest improvement in F Q4 2012. We look for AMS to lead the industry in innovation and service, and for Jabil AMS to continue to widen it's lead over the competition.

Moving from the present to the future, we believe 2012 will be our third consecutive record year, even though we will close on a more subdued note than we anticipated earlier this year. Jabil is building, and grooming the business for strong income growth for years to come. Investments in specialized services, healthcare and industrial, along with a sustained competitive position in traditional markets should lead to continuing high quality growth in revenue and in earnings for years to come.

In reality, superior long-term performance should be expected of Jabil. For example, as of 2011 there were 163 Fortune 500 companies with revenue over $16 billion a year. Not a single one of them posted higher growth in revenue, EBITDA, and GAAP EPS than Jabil over the 17 year period since we went public in 1994. And since 2008, only five have reported higher growth than Jabil -- Apple, Intel, and three financial institutions, JPMorgan, Wells Fargo and Prudential. Finally, for the 10 year period from fiscal 2001 through fiscal 2011, Jabil has posted a GAAP EPS compound annual growth rate of 11.5%. There is always room for improvement, but that's not a bad track record, considering all of the convulsive changes that have occurred over the past 10 years. Thank you for listening, and we are now prepared to take your questions. Operator?

(Operator Instructions).

And you do have a question from the line of Amit Daryanani.

Thanks a lot. Good afternoon. A couple of questions from me. One, maybe want to look at the (inaudible) quarter guide. Could you just talk a little, what do you perceive normal seasonality to be? I get it to be about plus 3%. And if I look at the delta due to a normal seasonality versus what you guided, which is down 1%, how much do you think is driven by the macro issues, versus a pause ahead of a big ramp you have in the DMS segment?

Amit, I think we're in a period where, just to make things simple, of our 10 largest customers, we've had two customers this year with revenue year-over-year that is down about $1 billion. We have a customer with revenue that's up about $1 billion. And the rest of the business is doing pretty well, growing at 5% to 10%, depending on the business area. So I would say, that the revenue headwinds have a lot to do with a couple of customer-specific issues, lack of a macro tailwind. I think end markets are relatively stable, but there isn't much of a tailwind. And in light of the circumstances that we're in today, and the overall demand environment, I feel pretty good about having a flattish quarter this quarter, with great spring loading of opportunity for outstanding growth in FY '13.

Fair enough. And then maybe just get some -- can we just talk about the RIM relationship, and given the fact that you're actually picking up incremental share with them in fiscal '13 it sounds like. How do we think about the fiscal '13 objectives you laid out at the Analyst Day, which I think assumed HVS would be essentially flat next year. Do we have (inaudible) higher number in that segment? And also on the margin line, how do you think the 2%, 2.5% margin target shakes out in the segment?

I think it's premature for us to handicap what the mobility customer's consolidation will mean to us, in terms of prospective growth in FY '13. Having said that, we have reviewed in detail our FY '13 plans, and still feel confident with what was presented at the Analyst meeting, which was growth of 25% in MTG, 15% in other Diversified Manufacturing Services areas, 10% in Enterprise and Infrastructure, and 0% in High Velocity.

I think we are -- I think in terms of how you should look at this, Amit, and the rest of the analyst community going forward, I think the granularity on revenue will be more difficult, particularly in short-term time horizons. But we have increasing level of confidence around our ability to deliver consistency in earnings on a long-term basis, and certainly in annual buckets. So while the revenues may shift around a bit from what we presented at the Analyst meeting, we feel very good about what that implies in terms of earnings for FY '13.

Perfect. Thanks a lot.

Okay.

Your next question comes from the line of Brian Alexander.

Thank you. In terms of the Q4 guidance for DMS revenue, I think it implies up 6% sequentially. Could you just give us a little bit more granularity, in terms of how you're thinking about Specialized Services growth sequentially, given the major product transition you have, and all the capacity you're adding versus what you're seeing in industrial and healthcare on a sequential basis?

That's not something we can discuss. I'm not trying to be unhelpful, Brian. I would love to help you out. But there are -- there's always sensitive customers issues within those three areas. And I don't think it's actually that meaningful, looking at it from an investor's perspective, because the margin structure, the health of the customers, all that kind of stuff is just not that meaningful. I mean we are delighted that even in a period where there's such macro uncertainty and lack of end market tailwinds, that we've got Diversified Manufacturing Services, which we intend to rely on for our primary growth engine the next four or five years growing within our targeted range of 20% to 30%. And I think the estimate is, Brian, it will be 25% for the full year, based on where we've guided. So I think that's pretty good.

What we talked about at the Analyst meeting might be useful to reiterate a little bit. Healthcare and industrial grew at a slower rate this year. I think we previewed that, actually at the beginning of the year, at the outset of the year that we think this would be a year in which we grow 7%, 8%. It may not be exactly that, based on Q4, but it will be a slower growth year. But with the pipeline of new product development opportunities, particularly in healthcare, we highlighted 20 to 21, 22 important new programs in healthcare, along with industrial. I think the sag in solar demand has attenuated the growth in industrial. We have actually had some very important new customer wins and program transfers in industrial. So when I look forward in FY '13, I think you'll see industrial and healthcare grow at a much healthier clip, much closer to the low end of the 20% to 30% range. And we may choose to supplement that in certain areas with an acquisition sometime in the close of this fiscal year or early next year.

Okay. That's helpful. Just to follow up on the bridge back to 4% E&I margins, versus what you outlined last quarter given the slower environment, any update there? How many quarters has that been pushed out? Do you think you could get there in FY '13? Thanks.

Well, we're 20 basis points light this quarter. There are some -- revenue growth is not quite as robust, and we've had some inefficiencies in product ramps as I have said. I think the revenue levels there will be sequentially positive, which gives us an opportunity to drive margin, particularly if we can get after the cost side of it. We may need an extra quarter to get back to the targeted range, but I think we'll maintain a positive trajectory.

Thanks a lot, Tim.

Okay.

Your next question comes from the line of Steven Fox.

Thanks. Good afternoon. First question on the enterprise outlook, can you just talk a little bit more granular, Tim, on what changed over the last 90 days in the end markets? And if any of the markets are still growing, relative to your previous expectations? And then secondly, just on the expansion that you mentioned in Chengdu, could you talk a little bit more about exactly what's going in there? I think you ranged it around a couple businesses, but what's driving it? And if I heard right, I think you said by the end of the calendar year it's going to be in production, and can you just sort of detail that a little bit more? Thanks.

Okay. On the Enterprise and Infrastructure, not a dramatic slowdown. In fact, some customers are actually expecting some revenue growth. I would say earlier this year, Steven, we were thinking that this second half of calendar 2012 would be a little bit more robust for Enterprise and Infrastructure customers, just because the spending levels have been so low. And typically, what we see is a pattern of under investment in a macro environment that has at least some growth, that spending tends to bounce back and there's a catch-up period. I think that's going to happen again. I mean it, Enterprise and Infrastructure spending is necessary, strategic, important. I think the fiscal constraints that governments are in all around the world, has resulted in very low levels of federal spending, government spending, and big corporations are risk-averse right now. So I think spend rates have slowed down a little bit. Eventually that will bottom and rebound. And man, are we chock-full of great customers in that area. So we will definitely outperform when that bounces back.

It's really on the margin, a little bit. Again, we expect sequential revenue growth. We have won some new business in the Enterprise and Infrastructure area. We have had a little bit of difficulty transferring them into our facilities. But we'll get through that over the course of Q4. I'd say, in terms of any other helpful color, storage has been a great business area for us and continues to be. That's probably led, in terms of being a robust business area for Jabil. That continues to be a good area for us. But we have great customers in networking in the telecom area as well.

You mentioned Chengdu. I need to tread softly there, because I can't highlight customers. That's -- that would preview individual customers, supply chain strategies. And we are not at liberty to do that, and that's consistent with the Company's long-term policy. So I'm not doing anything that's out of character for us. But you can bet they are sizable customers with significant requirements. And we will -- we intend to be in production by the end of this calendar year. But we can put traditional business in Chengdu. We can put specialized services, AMS business, MTG business, all kinds of businesses in Chengdu. It is not being done as a -- I mean it has the secondary benefit of being a cost edge against coastal China, and we may be able to use it in future periods. But it's really being put in place to support rising demand with multiple customers.

Great. Thank you very much.

Okay.

Wamsi, your line is open.

Yes, thank you. Your guidance range around operating margins is rather wide. Is that driven by, for the next quarter, is that driven by the uncertain macro environment? And maybe you could give some thoughts around what are the parameters that would move it towards the low or the high end of that range. It seems you could have the yield in DMS, or maybe it's the revenue mix. If you could shed some color on that, that would be helpful.

Well, it's -- it goes without saying that we are in an uncertain macro environment. I think we are influenced partly by that environment. It's no reason for us to be overly aggressive with our confidence about the macro environment. That's outside of our control. We did highlight a number of changes occurring simultaneously in High Velocity, in Diversified Manufacturing Services and Aftermarket Services. A lot of things for us to focus on this quarter, Wamsi. If we execute very well, I think we'll do well in a macro environment that doesn't tip over. If the macro situation weakens significantly and we fail to execute, that would drive us to the low end. But I think it's a period where a little bit wider range is very appropriate, given the number of changes and the highly dynamic environment that we are in today.

Okay. Thanks, Tim. And just as a quick follow-up, your comments about consolidation of supply chain at RIM, were you saying that you would be moving production into sites in Mexico and Hungary? Or did I hear that correctly? And then, the Chengdu and Wuxi expansions, are they also to support this mobility customer? Thank you.

We did say Mexico. Our mobility customer in High Velocity would be consolidating production in Mexico and Hungary for our portion of their requirements. So you did hear that correctly. And given that the Chengdu and Wuxi operations would be less -- actually we don't build any requirements in those sites for that particular customer. That particular customer is -- that mobility customer is supported from other sites.

Thanks, Tim.

Okay.

And your next question comes from the line of Amitabh Passi.

Yes. Hi, thanks. Can you remind us how much is left in your existing share buyback plan, and when do you go back to the Board for additional authorization?

Hi, yes, it's Forbes. There is a $30 million still available to us, so that would take it to $100 million. And we continue to discuss uses of capital on a quarterly basis with our Board, so that's pretty routine. So we will be having those continuing discussions at our next Board meeting.

Okay. And Tim, if you don't mind, I just wanted to follow up on the last question, with your margin guidance. I mean, I think the last time we saw 4.1% was in the August 2010 quarter, when you [had income] something like $[3.86] billion. So just trying to understand, maybe you could help elaborate what exactly gets you to the low end, outside of macro?

I'm glad you highlighted it, Amitabh, that it's been over two years since we've had -- (Laughter).

Exactly.

For our operating margin, that's very helpful. I appreciate that. (Laughter). And I might as well just mention again, that 6.5% EBITDA is the highest level since the fourth quarter 2005. (Laughter). In any case, no, I mean, really it's just a matter of, if revenue is far less than we thought, and we struggle with some of the operational challenges that we have this quarter, it could drive it to that lower level. Now, we have not been at the low end of our operating margin guidance in my flawed memory for a long time. So even this quarter, where our EPS and revenue levels were a little bit mixed, our margins were outstanding. And as Diversified Manufacturing Services continues to grow as a percentage of overall business, I think our margin profile will continue to be attractive. But there is a 4.1% at the low end. And it's tough to kind of handicap then, what down side scenarios could happen over the course of a quarter. But it would require quite a few of those down side risks to align together, and then that's possible. Nothing in particular, though.

Okay.

If you're worried about a particular event, there's no particular event that we're trying to handicap in.

Okay. Thank you. I'll jump back in queue.

Okay.

Operator. Your next question comes from the line of Craig Hettenbach.

Yes. Thank you. Forbes, two of your competitors talked about taking charges with RIM. Can you discuss kind of your thoughts on for Jabil, if there's any anticipation through some of these changes of having to take any charges?

No, certainly no anticipation there, no.

Okay. And if I can follow up with Tim. In the Materials Technology group, can you talk about the impact of available capacity in that group? Obviously, there is a lot of focus on one big customer. But outside of that, are you capacity constrained, such that as you look to diversify or win new business with other customers, would that impact you in the coming quarters? Or if you could frame that, that would be helpful.

We're at high levels of capacity utilization in our MTG group. We have a wide range of sites, stretching from to Shenzhen to Suzhou, and Nanjing, Yantai, Tianjin, Wuxi, Taichung, and soon to be Chengdu. So we have a lot of options. The management team in that group tries to keep the capacity insulated customer to customer, so that customers don't need to worry about a lack of resource, or focus in their particular production areas. So I think they do a very good job of managing that.

That's clearly a growth area for us. And we're adding resources in capacity to support a number of customers, but we try and keep them insulated as well as we can. Jabil has got a long history of the work cell business unit model, and keeping operational teams separate. So that each customer can rely on us to focus completely on their production requirements, and support their needs through the ups and downs of schedule changes. So I don't know if that's helpful or not, but that's probably the extent of what I can say on it, Craig.

Sure. No, that helped. If I could just -- a quick follow-up with Forbes, on the buyback program. If you look at it today versus a year ago, when you bought back, I think 200 million last summer, any constraints on the balance sheet? Or anything to think about in terms of capital allocation in the back half that would constrain the ability to buy back more stock?

No, no constraints from a capital perspective. Our balance sheet's in terrific shape, should we wish to do anything more. Our debt to EBITDA this quarter as we will exit this year, will be running about 1.5 times, so that debt level is about $1.7 billion. So essentially what that means, is we got somewhere between $1.5 billion and $2 billion of debt capacity available to us. So certainly, no constraints in that perspective. I would point out, we're continuing to invest for growth. I referenced $320 million of capital expenditures in the back half of the fiscal year, and we have talked about $0.5 billion of CapEx for next fiscal year. So even with those levels, and the cash we're producing, certainly have real comfort with how our balance sheet looks.

Got it. Thank you.

Your next question comes from the line of Sean Hannan.

Yes, thank you. So first question, realizing that RIM really represents most of your handset business there, the consolidation of the factories that you have already mentioned, is this also going to pertain to the -- all of your handset business? Or is this just customer specific?

In my prepared remarks, Sean, I mentioned a single mobility customer in our High Velocity sector intends to consolidate to fewer high capability suppliers. Jabil has been selected as one of those go-forward partners. And that, that production will be consolidated regionally in Mexico and Hungary, where we are already in production for that customer.

Okay. So on the assembly side, we're just talking that action. Okay.

Yes, yes.

Okay. And then separately, I had -- didn't quite get all of the comments around the Telmar. Did I hear that there were some customer issues? Was looking to see if I can get a little bit more clarity around what happened with Telmar in the quarter, and how to think of that business as we progress into Q4 and moving forward?

What I mentioned is the integration of the Telmar acquisition continues in AMS. And AMS is also -- there are some expenses associated with that. There is also a number of new service offerings that are multi-country and multi-layer that AMS has introduced for specific customers, and that's been a drag on earnings in F Q3, and will start to improve in F Q4. Telmar, I would say that we're delighted with the acquisition overall. It is contributing to our service offering for telecommunications customers in a very deep and meaningful way. And I would expect FY '13 to be much improved, in terms of AMS's outlook, and their ability to grow in a new vertical and an exciting new area. And so, we're really delighted with it. Short-term, we're going through the integration process, and so the accretion levels aren't as -- aren't what they will be in a quarter or two. But we are absolutely delighted with that acquisition, and already seeing synergies develop between Telmar and our AMS group.

And once you're into that period where you're fully integrated, and you're able to actually capitalize on the efficiencies you're hoping for, from either a top line growth perspective or from a margin standpoint, does that look to be materializing, again, a few quarters out, the degree that you anticipated in doing the deal? Or is there actually some better -- stronger benefits that you may actually capitalize on?

Yes, honestly, I'd say that it's been a little bit lighter than I had expected in the first couple quarters of ownership. But the prospectively, it will exceed its original business plan. So we are starting to realize the revenue synergies that we expected. So it's a little bit -- been slower getting out of the gate than we expected, but we actually think could be bigger than expected in FY '13.

Thanks very much.

Okay.

And your next question comes from the line of Matt Sheerin.

Yes, thank you. So Tim, you talked about the growth rates for FY '13, sticking to comments you made at your Analyst Day. And as you look at that pipeline and understanding certainly visibility for end demand is limited here, do you see some of those new business opportunities kicking in in the November quarter? Or is that going to be more backend loaded toward the back half of your FY '13?

Yes, we'll look at quarterly guidance on our September call. But I would imagine, we would start to see benefit in our first fiscal quarter. I mean, that's fair to say, in a year that we guided -- that we provided a framework for thinking about FY '13, that we have a good start in the first fiscal quarter. The only caveat to that is --

Okay, go ahead, I'm sorry.

The only caveat to that is we premise that on GDP growth that's positive, and low single digit. But if the world tips over from a macro standpoint, that's probably not going to be deliverable. But based on what we see today, and what we have in our hands, FY '13 should get off to a pretty good start.

Okay. And then same thing on the margin headwinds that you talked about, some of the new program ramps, customer transitions, Telmar, et cetera, do you also see some margin headwinds on program ramps in the materials group, as you're ramping new products for customers in the next quarter?

We don't provide any margin guidance or color on MTG. That's within Specialized Services within DMS.

Got you.

And all of the publishes the DMS area. But any time you are ramping new production, you are less efficient on the front end of that ramp-up. And as you get to more mature levels of production, you expect to hit targeted rates of return. That's pretty much true across the board. That's -- manufacturing is manufacturing, regardless of the activity.

Okay. And just last question, if I may, just regarding the mobility customer. Some of your competitors have walked away from that business, and have talked about returns and profitability goals below their targets. Have you talked to that customer? Have you -- do you have new contracts in place to ensure you're going to meet profitability and returns goals?

Well, that's an existing customer. It's not a customer that I deal with every day. But our executive staff and key people on our executive staff are in very close contact. We're kind of appalled at the way people walk away from customers. We believe that, if you do business with a customer and they rely on you for a set of services, you should continue to do that, through good times and bad. That's fundamental premise of being in our business. Our customers rely on us to provide, in many cases, 100% of their manufacturing supply chain infrastructure. They cannot deliver products without us.

So to the extent that you have a rational economic model, and rational risk/reward embedded in contractual agreements, and the rest of that kind of stuff, there's no reason ever to walk away from a customer. And so, I think that people think about stocks and how they trade sometimes, more than they think about what makes up a good customer and what doesn't. And we'll see where this goes. But we think that continuing to be a supplier in this regard, and enjoy the benefit of that relationship, and the investment that's been made in the relationship. And the opportunity to continue in production and have adequate returns, and a balance between risk and reward is much better for our Company, and much better for our shareholders than walking away from it.

Okay. Fair enough. Thanks a lot.

Your next question comes from the line of Shawn Harrison.

Hi. Just wanted to follow up on some earlier comments regarding the margin structure in E&I. I know last quarter, there was within the presentation maybe about a point of cost reduction, or improved overhead absorption type of dynamics. Has that changed, given some of the fluctuations here? Are you still kind of targeting that kind of cost reduction within E&I, as we look over the next, say, two to three quarters?

I think, certainly we have commented in the prepared remarks that we are not seeing the revenue growth that perhaps we saw 90 days ago. So we still believe that 4% target is within our range over the next couple, three quarters here. So if we don't see those benefits from a revenue lift, we will appropriately shift the cost structure. So certainly, it will be around about those levels, perhaps a little bit higher depending upon the revenue stream we see, as we move through the next 90, 120 days or so.

Okay. And then -- I'm sorry, just looking again, I guess, at the three business units moving into the fourth quarter. Is there anything happening, in terms of individual EBIT margins that would push them down beyond kind of volumes? Because it seems as if, just the low end of the guidance, maybe to paraphrase from earlier, is just kind of worst case scenario that you would be baking in, otherwise it would be kind of normal incremental margins on any type of volume dynamic?

Yes, there's nothing specific that we are baking in. I think, to stand by Tim's comments to an earlier question, as that lower end of the range there is predicated on that -- some macroeconomic headwinds perhaps that may be out there. But we're certainly not handicapping any particular segment in any particular way. We think it's appropriate range of guidance we provided. And I think as we said earlier, I certainly, I don't recall the last time that our earnings came in at those low end of ranges. We have got a really strong operating business model in place now. And we've been in a situation this past quarter with a number of activities going on, and still putting up 4.5 points. So certainly feel pretty good about the opportunity ahead of us here in the next 90 days.

Okay. So just finally on the Chengdu site. The decision I guess, to make it as large as Wuxi, was that something that you have been planning for a while? Or was that something just as demand has risen, you felt the need that you needed to expand the capacity to that size?

We have been exploring Western China sites now for two years, and we have pulled the trigger earlier this year after very diligent site selection and a negotiation process. So it's the result of some longer-term thinking, and will accommodate growth in the business. We are not starting with 2 million square feet. It has the ability to ramp up to that level.

Okay. Thanks so much.

Okay.

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

Thank you, and congratulations to you and your team there at Jabil. And first, a question for Tim, and then a follow-up one for Forbes. Tim, when you mentioned and referred back to your Investor Day, you talked about you still kind of see the same guidance there. I just wanted to clarify. Were you meaning the percent growth by each segment, or on the slide after that, you talked about a revenue level of $19 billion-plus. I think since then you've clarified at some conferences to kind of $19.3 billion to $19.4 billion. I'm trying to figure out, are all of those still consistent, or is it more of a focus on the growth? Because it seems like this year, the macros levels have us coming out of the gate just a little bit slower.

And then for Forbes, Forbes, you mentioned the higher tax rate. Can you help us understand kind of what geographic areas this is? And is it recurring at these higher levels, or is there some seasonality to the tax rate as we start to look ahead, and build kind of beyond one quarter for the tax rate? Thank you, gentlemen.

Yes, Jim, fair question. Are we talking about the absolute [dial off] level, or the growth rates? And I think we're still very comfortable with the growth rates that we outlined. If that -- if you're starting at a lower base, that will drive a somewhat lower top line. But I think more in terms of implicitly, what that drives for earnings and EPS in FY '13. Because we could be off in the revenue mix to a modest degree, and still deliver outstanding EPS results that would be consistent with what we talked about at the Analyst meeting. So fair question. If you were modeling it, I would model using the growth rates and if you have a lower base, use the lower base. I think from an EPS standpoint though, we're still real excited about what we can deliver in FY '13, and the next four, five years.

And, Jim, with regards to the tax rates, what we are seeing is a higher proportion of our forward-looking income coming from geographies such as China, where there is a tax rate of 25%. And India, our Indian facility is performing very well actually, where those rates are in the mid 30%s, a little bit north of the mid-30%. We are seeing a little bit of a structural shift, in terms of our income in the fourth quarter, and certainly, as we move into the first couple of quarters of next fiscal year. So for modeling purposes, I would encourage a rate in the 22% range, something of that nature. And we'll see how that shifts or plays out, as we move through the balance of '13, as we bring on capacity, and as we bring on additional income streams in other parts of the globe.

Great. Thanks for the details, and congratulations to you and your team there at Jabil.

Thanks, Jim.

Thanks, Jim.

Your next question comes from the line of Sherri Scribner.

Hi. Thank you. I just had two questions. One on the solar customer. I think you gave some detail in the prepared remarks, but wanted to get a sense of, if you feel there's any risk to additional customers in the solar business? And how much percentage of your business that is now?

Hi, Sherri. To your first point, no, we don't believe we have any other risk in that particular industry. We've got a limited exposure there. Last year, our revenue stream was considerably more. So just with the natural shift in the solar industry, our exposures have come down. And I suggest they will be at those levels in '13. So really not material, in terms of overall revenue stream. It's pretty small, actually now and exposure in that regard. So I certainly don't expect any further charges associated with our activity in this area.

Okay. Great. And then just turning back to the operating margin, and thinking about the different segments. I mean, if I sort of try to model it out based on the revenue growth, and I assume flat margins for DMS and E&I, it suggests that HVS gets back to sort of your historical target range of 2% to 2.5%, which you haven't been at for quite some time. Is there an expectation that HVS falls back into the past historical target range, and would you expect that moving forward?

We don't -- currently don't expect High Velocity to retrograde back to the 2% to 2.5% range. What we have said, Sherri, is we will address the long-term targets for sectors on the September call, and we would address a more reasonable High Velocity margin at that time. We have also said at conferences, and in other instances, that we think it's -- we think it's acceptable to think about High Velocity being a 3%-plus business for the foreseeable future.

Okay. That's helpful. Thank you.

Okay.

And you have a question from the line of Amitabh Passi.

Amitabh is back.

Actually, I'm okay. I'll follow up with you.

Okay.

Thanks.

Okay. Operator, thank you very much, and thank you to everyone for joining us on the call today. And we're available for follow-up to any questions you have on the third quarter performance or our fourth quarter outlook, as usual. So thank you very much.

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