Key Tronic Corp (KTCC) 2012 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Key Tronic Corporation Third Quarter of Fiscal 2012 Conference Call. (Operator Instructions) This conference is being recorded today, Tuesday, May 1, 2012. And I would now like to turn the conference over to Craig Gates, President and Chief Executive Officer. Please go ahead.

Good afternoon, everyone. I'm Craig Gates, President and Chief Executive Officer of Key Tronic. I'd like to thank everyone for joining us today for our investor conference call. Joining me here in our Spokane Valley headquarters is Ron Klawitter, our Chief Financial Officer. Today, we released our results for the third quarter of fiscal 2012. So far, it's been an outstanding year for Key Tronic. We're very pleased with our strong growth in revenue and earnings, which was primarily driven by production ramps and new programs. Since the third quarter of last year, our revenue has grown from $63 million to $95 million, and this third quarter of fiscal 2012 is the fifth in a row to set a new record quarterly revenue.

Meanwhile, and in spite of the challenges that go along with rapid growth, we have increased our operating efficiencies. This is no small feat, particularly since our revenue growth has been entirely organic. We added new facilities, new people, new production processes, and made several significant business process changes to enable our continued profitable growth. I am extremely proud of our people and of their performance during this challenging and rewarding period in our history. During the third quarter, we continued to capitalize on our unique combination of world class engineering, global logistics, and cost effective production, as well as our advanced capability to produce products that have not traditionally been outsourced. As a result, we continue to diversify our future revenue base by winning new programs involving transportation management, medical, and consumer electronic devices.

Now, I would like to turn the call over to Ron to review our financial performance, then I will come back on to discuss our strategy going forward. Ron?

Thanks, Craig. As always, I would like to remain you that during the course of this call we might make projections or other forward-looking statements regarding future events or the Company's future financial performance. Please remember that such statements are only predictions. Actual events or results may differ materially. For more information, you may review the risk factors outlined in the documents that the Company has filed with the SEC, specifically our latest 10-K, quarterly 10-Qs, and 8-Ks. Please note that on this call we will discuss historical financial and other statistical information regarding our business and operations. Some of this information is included in today's press release and a recorded version of this call will be available on our website.

Today, we released the results for the quarter ended March 31, 2012. For the third quarter of fiscal 2012, we reported total revenue of $95.5 million. This is up 51% from the $63.4 million in revenue in the same period of fiscal 2011. The first nine months of fiscal 2012, total revenue was $249.7 million. This is up 33% from the $187.8 million in the same period of fiscal 2011. Despite the fact that the third quarter was quite backend loaded with around half our shipment in the last month, and the fact that we have been moving many new programs into production, we have continued to improve our gross margins. Our gross margin was 9% in the third quarter of 2012. This is up from 8% in the previous quarter, and 7% in the same period of fiscal 2011. For the fourth quarter, we expect to see our gross margins continue to be around 9% to 10%.

Operating expenses were $4 million in the third quarter. This is up 22% from the third quarter of last fiscal year, but it's up much less than our year over year growth in revenue. Although the new program startups that fueled our revenue growth have required the addition of new engineers or program managers, we have done a pretty good job of controlling our costs and the percentage of operating expenses continue to decline as a percentage of revenue. Net income for the third quarter of fiscal 2012 was $3.4 million, or $0.32 per share. This is up from $700,000, or $0.07 per share, for the same period of fiscal 2011. The first nine months of fiscal 2012, net income was $7.8 million, or $0.74 per share. This is up 86% from the $4.2 million or $0.40 per share, the same period of fiscal 2011.

Turning to the balance sheet, we continue to maintain our strong financial position as we rapidly expand our business. Our inventory was up only 1% from the previous quarter despite our much higher production levels and preparations for future growth. We're continued to--continuing to see an improvement in our overall inventory turns. Trade receivables were 59.7 million at the end of the third quarter. This was up 26% from the end of the prior quarter, reflecting our significant growth in revenue. Our DSOs were about 50 days compared--which is really comparable to recent quarters. Our capital expenditures for the third quarter of fiscal 2012 were approximately $600,000. And this concludes the buildout of our newest manufacturing facility in Juarez, Mexico. We expect CapEx to be about $5 million for fiscal 2012, which is comparable to fiscal 2011.

Moving into the fourth quarter of 2012, many of our new programs continue to ramp up, and despite the uncertainty in the global macroeconomic environment, we still expect to see revenues go up in the fourth quarter. Taking these factors into consideration, we expect revenue in the range of $93 million to $98 million in the fourth quarter of fiscal 2012. In the fourth quarter, we expect to see our gross margins to remain around 9% to 10%. We also expect our operating expenses to continue to increase at a slower rate than our revenue growth in coming periods. Taking these factors into consideration, we expect earnings in the range of $0.31 to $0.37 per share for the fourth quarter, and this excludes any tax benefits that may be recognized during that period. The expected earnings range assumes an effective income tax rate of 30%.

In summary, the financial health of our Company is excellent, and we believe Key Tronic is well positioned to continue profitably expanding our business.

All right, Craig. That's it for me.

Okay. Thanks, Ron. So to summarize Q3, it was our fifth consecutive record revenue quarter. At our current run rate we are entering the second tier in our market. This gives us more opportunities to win larger programs. We are now the ninth largest U.S. contract manufacturer and expect to be sixth next year. New business has powered our record growth and we now have 42 different customers and 155 discrete programs, while our pipeline of new business opportunities remains strong.

There are three major competitive advantages behind our continued success. First, increasing costs in China are forcing localized production, Mexico for North America, and China for Asia. We stand alone in the excellence and breadth of our Mexican operations.

Second, our unique organizational structure, which we have honed over 25 years of experience running offshore operations, brings significant advantages to OEMs who want offshore costs, but fear IP loss, do not want to manage an offshore relationship, fear offshore schedule risk and inventory uncertain, and want onshore engineering and prototyping.

Third, our size and responsiveness compared to our degree of vertical integration and engineering capability, become even more attractive as the push for localized production intensifies. With these three competitive advantages powering us, we expect to continue to win market share and focus on profitable growth over the long term. This concludes the formal portion of our presentation. Ron and I will now be pleased to answer your questions.

Thank you. (Operator Instructions) And our first question comes from the line of Mike Cikos with Sidoti. Please go ahead.

Hi, guys. Congratulations on the quarter.

Thank you.

Hey, Mike.

Just a couple of quick questions for you. First was how many--I guess how many programs were you working on this quarter that were generating revenue for you?

Well, that was the number I gave you, the 150--what was it?

155.

155, yes. That's the number of programs - programs that are actually in the factory generating revenue. There are more than that that have not yet made it to the factories to get to the process of setting it up in our documentation system and getting parts in place and getting the processes put in place.

And how many new customers or programs did you win during the quarter?

We won three new customers.

Okay. And that's for the transportation management, the medical, and consumer electronic devices?

Correct.

All right. My other question for you was the size that you guys are getting to. You are the ninth biggest in the United States. By your projections, you'll be the sixth largest in the U.S. next year at this time. As you get to that size, I mean, will you be working on bigger projects then, which will be able to widen your gross margin?

Well, we actually just sat through a two-hour meeting about 1.5 hours ago trying to figure out of all the new programs we've won, what direction we're going as we look at programs that are in the $1 million, $2 million, $3 million range versus those that are in $10 million to $15 million, versus those that are in the $30 million to $50 million. As we've been growing, we've been starting to I guess put a little bit of a sort on--or a filter on the programs we're willing to quote and on the type of programs that we think are going to be worth our time. It's not necessarily true that a $1 million program is too small for us, because there are companies and opportunities that may start at $1 million, but we think they're going to grow to $15 million or $20 million. So it's also not true that a program that's only $1 million is too small because it may be something that's destined only for Spokane and we want to continue to use Spokane as our prototype and NPI shop. So there's a whole lot of different factors that have to go into deciding which programs we're going to take and which programs we're going to really focus on. So it's kind of complex to answer that question. We do think that as we get bigger, we'll get quote opportunities that are on bigger programs than what we used to see before. And we are seeing that happen already as we've gone from 190 up to pushing a 400 million run rate. We are getting opportunities at bigger quotes than what we used to be allowed to even quote on before.

But it's not necessarily true, Mike, that the bigger programs are going to be higher gross margins. If anything, it's going to be more competitive and I think that was part of your question.

Yes.

You got a lot more absorption, obviously, with the bigger programs. So incrementally you may have some good benefits, but you have to bid those a lot tighter and there is a lot more competition the bigger the programs.

And that's kind of the--I guess it's the multi-million-dollar question is as we continue to grow are we going to be able to continue to increase our revenues quicker than we have to add people and cost to service those revenues. So far, we see those lines continuing to diverge and it's hoped that as we are able to quote and win bigger programs they'll continue to diverge, but that's kind of unknown.

I see. Thanks for the backdrop. And just one follow-up question. With the new programs that you've won for transportation management, medical, consumer electronic, I was hoping you could also discuss any markets where you're seeing particular strength as far as potential customers wanting to outsource their manufacturing services.

We've taken a strange approach to that, at least it appears to be strange from the feedback we get from the people we talk to on the roadshows and other discussions. We have never focused on a particular market, so we will go after any business that (a) is moral, and (b) makes use of our unique advantages, the vertical integration we have. The growing amount of strange business we have--when I say strange a lot of people talk about contract manufacturing as box build, and by that they mean they're going to slide an assembled PCB into a white box and test it. If you were to take a tour through our factories, you'd see a strange and bewildering array of products, a lot of which move, a lot of which are strange and large and bulky, a lot of them have gears and pulleys and belts and chaffs and bearings, so it's not your typical box build. So in terms of the markets that we see strength in, I was just looking at Phil's--our VP of Sales--board--white board, and there's a wide range of different markets up there for quotes that we expect to win in this quarter. So it's not really any one market that we see that's driving it. It's more the descriptors or the attributes of the market, the people that value those three competitive advantages that I talked to just a minute ago.

Okay. Thanks a lot for your help, guys. I really appreciate it. And keep up the good work over there.

You bet. Thank you.

Thank you. And our next question comes from the line of Orin Hirschman with AIGH Investment Partners. Please go ahead.

Hi, thank you. And congratulations on another great quarter.

Thank you.

So you mentioned three new customers. How are we to view it? Is that a good number, the three new customers? Is it not meaningful because we have to really look at the number of programs ramping from existing customers, which in some way it might be better? How are we supposed to view that number?

Well, I would say you should view that as encouraging. We are running between two--probably two to five new customers a quarter win, if you look back over the conference calls. So as long as we're within that range for new customer wins, it would suggest that the pipeline is as full as it should be. On the other hand, if we were to have a quarter where we only won one, I wouldn't get concerned about that, because the next quarter it looks like we might win six. It's not that you can say this is a very constant and steady flow, but you can say that three is a good number and should be about what we expect.

You had mentioned--or had hinted at in prior calls that clearly you've almost been able to begin to cherry pick in terms of projects that you want and projects that you don't want just because there's a lot of demand for small and midsize programs with a--with someone who's responsible like Key Tronic is and has a good proven track record. Does that remain the case, and is it even accelerating because of the trend that you mentioned in terms of people wanting to move back onshore to some degree?

Yes, it's definitely the case. We are getting a lot higher I guess you would call it quality of quote opportunities. We're able to be more selective. We every now and then will take a risk on a startup company and we're a lot more harsh with those opportunities than we used to be in that we require upfront cash. So it--across the board we are able to be quite a bit more selective than we used to be.

Okay. And I don't know if you can disclose this, but you indicated where you'd like to be in terms of size for next year, I mean, move from number nine to number six. What size is number six?

Well, I'm not going to give you that number. You'll have to look on the documentation for the industry. We don't--.

--Okay.

We tried to give a 12-month number a year ago and it didn't work out. So we've decided we're just going to stick with quarters.

Well, you--.

--And the way we come up with that is we just take our current run rate and annualize it and compare it to that list of the top 50--.

--Okay--.

--[EMS] companies worldwide. That's where we would have landed on the list, number six, at our current annualized run rate.

Okay. Just one additional follow-up, in terms of getting (inaudible) with the magic $500 million number, in terms of your existing infrastructure, are there any major overhauls you need to do at some point meaning if the $500 million or $600 million or $700 million where all of a sudden you can't handle it anymore with the existing infrastructure without some major overhaul, or that's not the case here?

It's pretty much a step and repeat as far as bricks and mortars go, we're okay. And as you can imagine, the real estate situation in Juarez is working in our favor quite a bit. The only issue we see is our growth can't outstrip the availability of new people and our ability to get these people into the company and get them into our culture. So I don't see there's any one single step function where we hit $522 million we're in trouble. But overall, we are adding people as we go and as much as you might find it hard to believe, it's hard to find exactly the right kind of people we want. So I don't think there's any big inflection point. It's just a continual pressure on let's not get too many people so we don't overload ourselves, but we have to keep up with the people we get in time for the business, because the worst thing you could do is work hard to land a piece of business and then lose it because you can't service it.

Okay. Thanks so much.

Thank you. And our next question comes from the line of Bill Dezellem with Tieton Capital Management. Please go ahead.

Thank you. I have a group of question. First of all, you mentioned the $95 million run rate. Do you see anything coming in say the next three quarters or for the remainder of this calendar year whether it be seasonality or customer programs ending or any other factors that--and by the way, customer programs ending that aren't going to be replaced by those customers just bringing the next program up. Anything that you believe will--let me phrase it differently--anything that you know today will lead to a decline in your revenues from the current level?

As you and I have talked, we really can't look out for more than a quarter and know for sure what's going to happen. I've told you probably I guess the best way to say it is that we used to talk about the mismatch where we knew something was a mismatch and was going to go away because either the customer or the program didn't fit us or we didn't fit them. So if we look at our current customer base, we don't see any mismatches like we used to see. We don't see any overhang where somebody is threatening to leave. We don't see any customer who is unhappy because of the way the business is going with us. We see ups and downs everywhere we look. But in terms of those big mismatches that we used to fear and try to run away from as fast as we could, there is none of that that is hanging over our heads right now.

And seasonality, is there anything that you see there with your makeup of customers that will lead to any particular quarter falling off, whether it's Europe in the September quarter or anything else?

Not that we can see. We have seasonal products, but there are so many of them now that they tend to offset each other.

Great. Thank you. And then, let's shift to the three new programs that you won. I think in response to an earlier question you said that those are three new customers. Is that correct?

Yes.

And what is the size of each of those customer wins as you are thinking once they're fully ramped?

All three of those would be between $5 million and $15 million per year.

And then, finally, when we look at your incremental gross margin, in the current quarter versus the year ago quarter, so March 11, it looked like it was something in the neighborhood of 14%, versus the December quarter it was approaching 17%. Is that range--call it 15% plus or minus--an appropriate incremental gross margin to be thinking about as you build the revenues going forward?

That's the model that I would recommend. If you're building a model on us and looking for a single point number, that would be it, about 15% incremental.

And then, you did something--what I think was a little bit miraculous--and that is that the revenues were up $11 million sequentially, and yet your operating expenses--I mean, I would normally say they were flat, but they were actually down a few thousand dollars. I mean, that just seems nearly impossible to accomplish. How did you do that?

Well, if you think back to the conference calls, we were talking about the severe problems we were having with backend loading and getting new programs in place and spending money on air freight and overtime. And so that's--the answer to your question is we've got quite a bit of the program technical risk under control now. The forecasting and the procurement of materials for those new programs is more under control now, so we're able to run a bit more efficiently than we were in the previous quarters.

But you're talking about operating expenses, right, Bill?

That's correct.

Yes. So operating expenses, which is--what really drives that primarily is headcount and that's our engineers and program managers. And that--a good portion of that--I always look at about almost--at least 80% of it's fixed. But we're going to be hiring in that. With the variable component of the operating expenses is primarily the engineers that we have to hire to handle new programs and the program managers. Other than that, we do have other functions at the corporate level that are variable, but not nearly as much as you'll see in the cost of goods sold. So--.

--Thank you both.

Thank you. (Operator Instructions) We have a follow up question from the line of Bill Dezellem with Tieton Capital Management. Please go ahead.

All right. I guess I should have just stayed on. I wanted to give others an opportunity. So the--you mentioned that things went a little more smoothly this quarter. And yet, I think in the opening remarks it was mentioned--Ron, I think you said that the quarter was backend loaded and roughly half of your revenues came in that last month. That actually leads to two questions. The first is why? What was the cause of that backend loading? And then, secondarily, what, if any, costs did you incur to deal with half your revenues coming in that last month?

Well, the cost this time was customers, their forecasts, when their orders came in compared to when they thought they were going to come in. And the reason that even though we had to build it in the second--or the third month of the quarter, the reason though it was a little--the reason that it was a little bit easier is because the programs were in a more mature state. So although the orders came in a little bit later than we thought, we were in a position that we could build a product rather than out there trying to figure out how to build it. Same thing with the supply channel - even though the orders were late, we were expecting them to come and we had the new supplier set up and the parts in the pipeline. So there's--just because it's built in the--half of the revenue is in the third month, that can be either an absolute disaster where everybody is working 20 hour days to try and figure out how to get it built, or it can be relatively smooth and you work some overtime in the factory. So in this case, it tended towards the smooth rather than the run around like a chicken with your head cut off situation.

I don't want to give you more credit than you deserve. But does this imply that you're actually getting better at growing?

No, I think that would be credit we don't deserve I think it's more the timing of what new products are actually ramping in the factory in that given quarter, the engineering capabilities of the customers from whom we won the business, and the technical maturity of the product that we're trying to transfer into the factory. So all of that's kind of a bunch of random numbers you could generate. So if you were to imagine that a customer gave us--awarded us a new program that had never been built before and we had to put it in our factory and figure out how to build it and could really count on no advantage from our customer ever having built it before, and then they can--if you can imagine that product has some technical difficulties, so our engineers are either in Juarez or China trying to figure out how to make this thing, and then at the same time, as they're figuring it out, a couple of parts have to be modified, so we have to go back to the supply chain and get different parts. That's kind of the worst case scenario where it's just going to be really hard to get that built in the third month. So that's kind of what happened previously. And then, the opposite of that is if you get a business award that has a mature product, it's basically a process of just transferring it out of one factory where the product was being built well into another factory. All the documentation is there. The supply chain is just a matter of switching the pipes from the guy that was building it before to us. And it's just a matter of getting our people trained. That's kind of the other end of the spectrum.

That's helpful. And this next question maybe has been answered in part over the course of the entire call. But at a high level, what would you say went well during the quarter and what went poorly or that you would have liked to have improved upon? And if you can, if it's already been addressed, everything and there's nothing to add, then fine. But if there is, it would be helpful.

Well, I'd say what went well was that the factory, our procurement people, all responded to some very tight timing and were able to turnaround very quickly a lot of production in a smooth fashion and with a high degree of quality control. That's what went well. What was tough was we had a couple of pretty high volume products that we had just put into the factory that required our engineering intervention in order to more or less modify the design a little bit and [cheer] some inherent issues with the product before we could actually ramp it. So you can look at that as glass is half full or glass is half empty. On the half empty side, it was bad because we had to spend a lot of people's time working a lot of overtime in the technical ranks to figure out what was wrong with this product. The good side is that the customer is now quite a bit more aware of what we can do and understands the value that we can bring even beyond what they knew when they picked us. So it's a--it pays off in the end for us.

And that's a very nice segue to what I think is going to be my final question, and that is as you have grown and have moved from 20-some customers to 40-some customers, to what degree has your awareness increased with prospective customers? And I guess the question is really oriented towards the idea of the degree to which the ease of the selling process has improved.

Well, if you go back to the 140 million days to the 180 million days to the--if you want to call it a 400 million run rate today, it's almost unrecognizable, the sales process that we used to have versus the one we have now. Back in the bad old days, every program we won we had to dig out from under a rock. Nobody knew who we were. We had to take them through a factory that didn't look like a contract manufacturing factory. It looked like a keyboard factory. And we had to convince them that we had the wherewithal to figure out how to build their product. So if you contrast that with today, we have a growing cadre of people in the marketplace who have worked with us and have left one company and gone to another. So we get a lot of calls from folks who land somewhere new and call us up and say, hey, I just got a job here and I want you guys to come in and quote this because it worked out so far--so well for me at company XYZ. Then, when we bring people into our factories, they get to see just a beautiful, wonderful example of what a CM factory should look like. And instead of having to convince them that we can figure out how to build their strange product, we can take them out and show them any number of products that nobody ever thought about sourcing before.

And then, when we talk about our ability to provide them with the kind of service that they have to have, because they're laying their customers--I mean, their companies' future on the line, we could in essence give them our list of customers and say, stick a pin in it and I'll give you the name of the person to call at that customer and you can get a reference from them. So it's just--it's gone from swimming in mud to walking on water in terms of how hard this is to win new customers.

Thank you, again, and very nice quarter.

Thank you.

Thank you. And we have a follow up question from the line of Mike Cikos from Sidoti. Please go ahead.

Hi, guys. Just to piggyback on a couple of questions that Bill had asked earlier. The first question as the three new customers ranging in $5 million to $15 million a year once fully ramped. About how long do you think it's going to take to get those guys fully ramped? Are we still looking at the--what is it--I think it was 12 to 18 months?

One of them is going to be pretty quick--unusually quick. The other two are probably going to take the typical year to 1.5 years.

Okay. And just the point of--I was a little confused when you were discussing with Bill the operating expenses declining sequentially. I know Ron was discussing how about 80% of the operating expenses is fixed. But then, he was talking about hiring additional engineers here and there to help support the sales growth that you guys are seeing. With the growth that you are seeing, are there plans to increase the number of engineers working for you in this upcoming quarter then?

We've been adding people pretty steadily for the last 1.5 years. Again, it's a matter of when you find them and when you add them. So we expect that we're going to continue to have to add. And we're right now looking for--I think I've lost count. It's probably over 15 people in the engineering and program management ranks. So it's fixed in the short term, but it varies with the business in the long term.

Okay. So this--I mean, the operating expenses that we saw decline on a sequential basis then from Q2 to Q3, was--we would attribute that to being more of a fluke then in light of the fact that you will need to hire additional engineers. I would take it then that there wasn't as much hiring in this third quarter?

We wish we could have done some more hiring, but we couldn't find them. And you're exactly right. It was a timing fluke, rather than anything you could count on going forward.

Terrific. Thank you guys.

Yes.

Thank you. And our next question comes from the line of Matthew Dodson with Edmunds White Partners. Please go ahead.

Yes. You mentioned that this quarter was more backend weighted. So your networking capital or your working capital should sequentially get better. Can you kind of walk us through how much cash you're planning on generating this quarter and what you guys are planning on doing with the cash?

Well, the second part of your question first is we'll just use our cash to pay down debt. So we've had about $16 million of [borrowing] (inaudible) revolver at the end of the third quarter. So as we generate cash we pay down the revolver, and then we draw on the revolver as the working capital goes up. What happens with that backend loading of the revenue, it really hits our accounts receivable because we're averaging about 50 days payment. So if you got half of your revenue in the last month, you're not going to collect that and it's going to show up as--at the end of the quarter a spike in receivables and use of cash. But as far as generating cash going forward, we've got about $500,000 to $600,0000 a quarter in depreciation expense. And we're looking at--to hit our earnings range that is about a $5 million pre-tax earnings and we're not really paying any cash taxes. So we expect around $5 million to $6 million of generating cash just from operations, just from your running the business. And if we get only 40% of our revenue in the last month instead of 50% of our revenue in the last month, that would have an impact of about $4 million to $5 million of earlier collection of receivables. So hopefully, that gives you the numbers to work with. But that's--so as far as a single point in time, EBITDA should be around $5.5 million, $5.5 million to $6 million, and then working capital - receivables will come down if we get revenue earlier in the quarter and less in the backend loading.

Thank you.

Thank you. And our next question comes from the line of Orin Hirschman with AIGH Investment Partners. Please go ahead.

Thank you. You had answered it before, but just in terms of the ease of customer acquisition and also the value added. It sounds like from the--from your ability to help the customer on the product side is really beginning to take hold. I did have one additional follow-up though, just in terms of we keep talking about the new cost numbers, but I believe there is a lot of new programs for existing customers that are in the process of ramping. Could you just comment on that as well?

Well, I don't know what to say about that that we haven't already said. There are a lot of new programs that we're ramping in the factory. There are a lot of new customer programs that haven't hit the factory yet. There's a lot of new wins that haven't gotten through the pipeline of what it takes to put it in the factory. So we've always kind of argued with ourselves whether or not we should try to get very precise on this or whether we should just give a qualitative it's looking good and continues to look good, because if we're trying to get qualitative, we have to somehow map out all these different customers, all these different programs, and what stage they're in. And it just didn't seem to us like that was going to help anybody out, so we haven't done it. So I can't answer your question with a whole lot more other than what I just said.

So just say--would you agree that the exist--the penetration at the existing customers continues to increase?

On a customer by customer basis, the answer is either a resounding yes or a kind of or a no.

Okay.

So that's my problem. So there's 42 of them. So if I just take the top five, there's one of them that we fully penetrated. The only way we're going to get any more revenue out of them is if they grow. If I take the next one, we're only 15% penetrated into what they could give us. If they make what we think are the right decisions in the future about whether they should outsource or stay internally, there could be big opportunities for growth there. And if I just went through the top 10, I'd have a different answer for you on each one. This is a very strange business. It's really hard to characterize and average.

Okay. But it's--the bottom is they're happy with you, so it's a matter of if they're going to do more outsourcing, you think you have a good shot to get it.

In that (inaudible), yes. That is indeed the case. And there is always a--in our business and particularly in Key Tronic's portion or niche in this business, we end up with a lot of let's call them first time outsourcers, so they still have production capability in their own company. And so, there's always the ongoing debate with these customers on whether or not they should go 100% outsourced, whether they should stay split between in-sourced and outsourced, or whether they should reverse and go back in-source. So our role is to make sure we do a really great job, so that they can see the advantages of outsourcing and then hope that the decision goes in our favor. But it's always--it's an interesting process.

Okay. Thanks so much.

Yes.

Thank you. And our next question comes from the line of Ethan Steinberg with Freiss Associates. Please go ahead.

Hey, guys. Thanks for taking the call. Just on that last question, I am sort of curious that with the growth the last couple of quarters it's obviously been traumatic. Can you give us some sense of how much has been from new programs first growth with existing programs or existing customers?

Hang on a minute. Let's calculate.

And just a rough approximation is fine. I'm just wondering if--what's the primary driver behind the sequential growth rates, and then, also in the quarter you just guided to.

Okay. So simply think about it this way. About half of the growth has come from our increased penetration of our top customers. The other half has come from new programs with new customers. And that's really crude. If you maybe--.

--That's fine. No, that's helpful though.

Okay.

And is that--and that's been pretty consistent for the last couple months--or I mean, last couple quarters, and for the quarter you just guided to?

Yes. Yes, it has.

Okay. Interesting. And then, is there any or much seasonality to the business that we should be thinking about as you--I don't know, in the pan--the quarter you just did or this next quarter as we get farther through the calendar year?

There's a lot of seasonality customer to customer, but so far it seems to offset.

Okay. So not really as far as your P&L.

No.

Okay. And then, understanding the cadence of the quarter, it sounds like the third month was a lot higher than the first two months. Is that--that just has to do with the customer forecast being less accurate on the timing and the deliveries coming in later?

Yes, it does. We get pretty frustrated with it, so we forced our unfortunate planning people to keep really tight records. And now, we can say with surety that it's not due to lack of parts, it's not due to engineering issues. In this last quarter it's due purely to when the customers got the orders they thought they were going to get.

Okay. So then, just on the cadence though, if you're thinking about it, that means the average for the quarter was--monthly was lower than the run rate coming out of the quarter, but the guidance--and I missed the beginning of the call, so maybe you covered this. But the guidance implies the midpoint almost the same revenue sequentially. But it sounds like I guess the momentum leaving the quarter is higher, plus you've got new wins and programs ramping. Why aren't the revenues expected to be up more sequentially?

Well, it's the same process where the customers will forecast say $10 million and they think it's going to get spread three, three, and three, and instead it gets spread much more thinner in the front two and thicker in the last one. And the same process will happen again. A lot of these customers are public companies and they're all trying to push the envelope and get the revenue, so they'll forecast as if it's even, but everybody will be out beating the bushes in the last month to try and hit their goals.

Okay. So have you seen that step down in the first--like we're already into May, so did April step down from March?

I don't want to give you that answer because then we're talking about stuff we're not supposed to disclose.

Okay. But then, how about just taking the midpoint of the guidance? It's essentially flat and it's a great number, so take it the wrong way. But it's essentially flat sequentially, but it sounds like you've got a number of existing programs that are still growing as well as some new programs. Is there any reason you wouldn't have a more positive sequential trend because of that?

The reason we don't have a more positive trend is that it--a lot of these things are up, down, in and out. When we've got 155 programs, it's pretty hard to have a nice steady line that you can say this is a straight line, this is a trend, and we're going to be plus or minus 2% of it. So we have some customers that find out they have too much inventory. We have other customers that find out that they don't have enough. And it's just--it's not something where you can say this is going to be a smooth steady straight line growth that you can count on plus or minus 1%. It's going to be lumpy. The overall trend is going to be positive we believe. Everything we see says it's going to be positive. But week to week, month to month, you can't say that everything is going to go smoothly in the same direction.

Sure. Any reason to think this quarter is a lot less or more backend loaded?

From the data we just spent a bunch of time gathering, I suspect this current quarter is maybe going to be a little bit better and the one we just finished was maybe a little bit worse. We've got a board member who's been around for probably a couple centuries. But he gave me a lecture. He said I needed to claim down, it's been like this for 50 years (inaudible) forever.

Okay. Well, great. Congratulations. Thanks for taking my questions.

Thank you. And we have a follow-up question from the line of Bill Dezellem with Tieton Capital Management. Please go ahead.

Thanks. I couldn't help myself, but you may have just answered one of these questions, which was that it seems as though if we put some of the different pieces of the puzzle together, that if you don't see anything that you know will take revenues down and you have all of this new--all these new programs that are ramping in the factory and those that still need to move into the factory to begin their ramp, that directionally revenues over at least the foreseeable future should be increasing. Am I missing anything conceptually there?

No, you're not. That's our hope.

The only thing you're missing, Bill, obviously, is how well our customers do in the marketplace.

Yes.

So we're still at the mercy of how well they do. And so, all we can do is get--work off the forecast we've gotten from our customers. Now, if they come in with some upside, that would be great. But that's the best information we have right now. Each customer is unique.

So it's like the discussion you and I had a long time back, Bill. We kind of have the same jobs. I can't tell you what's going to happen for sure this quarter or next. But my job is over the long run to make sure that the trend is up, just like yours is. And from what we can see, the trend sure looks like it's up, but we sure can't guarantee that it's going to be up every quarter or every month.

Got it. And then, in response to a prior question you mentioned that one of the three new customers that you won this quarter is actually going to be a bit unique, that they're actually going to ramp more quickly. As a matter of fact, it sounds like quite a quick ramp. Would you please discuss the backdrop with that customer, and maybe even which one of the three--whether it's the transportation, medical, or consumer electronics? And then, what it is about their situation leading to this unusually quick ramp? And also, of course, I'd like to know what the size is - whether it's one of the 5 million or the 15 million.

Okay. First of all, I don't want to tell you which one it is because I'm going to end up dog cussing one of my competitors, so that's not classy. The reason these guys have to leave quickly and come to us quickly is that one of our competitors has let them down pretty severely. So they're in a situation where our customers never want to be where their CM is not performing and is not performing to the extent that it's damage their business. So even though it's going to be a very sweaty transfer and absorb a lot of their time to make it happen, they're willing to invest that burst of energy and effort and distraction from running their business to get the business transferred from our competitor to us. And it's--well, this is between 5 million and 15 million.

Thank you.

Yes.

Thank you. And at this time I'm showing no further questions in my queue. I'd like to turn the conference back over to Management for closing comments.

Okay. Well, thanks everybody, for participating in the conference call, and we look forward to talking with you next quarter. Have a good day.

Ladies and gentlemen, this does conclude the Key Tronic Corporation Third Quarter Fiscal 2012 Conference Call. If you'd like to listen to a replay of today's conference, you may do so by dialing 303-590-3030, or 1-800-406-7325, and entering the access code of 4522733#. We thank you for your participation, and at this time, you may now disconnect.