Sanmina Corp (SANM) 2010 Q1 法說會逐字稿

Good afternoon. I will be your conference operator today. At this time, I would like to welcome everyone to the Sanmina-SCI first quarter fiscal 2010 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions). Thank you. Ms. Bombino, you may begin your conference.

Thank you, Chenelle. Good afternoon, ladies and gentlemen and welcome to Sanmina-SCI's first quarter fiscal 2010 earnings call. Today's call is being recorded and is posted along with a copy of the earnings release and slide presentation on the quarter at www.Sanmina-SCI.com in the Investor Relations section. You can follow along with our prepared remarks in the slides posted on the website.

Please turn to slide two, the Safe Harbor Statement. During this conference call, we may make projections or other forward-looking statements regarding future events or future financial performance of the Company. We caution you that such statements are just projections. The Company's actual results of operations may differ significantly as a result of various factors including the state of the economy, economic conditions in the electronics industry, changes in customer requirements and sales volume, competition, and technological changes. We refer you to the documents the Company files from time to time with the Securities and Exchange Commission, specifically the Company's most recent report on Form 10-K for the year ended October 3rd, 2009. These documents contain and identify important factors that could cause actual results to differ materially from our projections or forward-looking statements.

You will note in our press release issued today that we have provided you with a statement of operations for the three months ended January 2, 2010 on a GAAP basis as well as certain non-GAAP financial information. A reconciliation between the GAAP and non-GAAP financial information is also provided in the press release and posted on our website. In general, our non-GAAP information excludes restructuring and integration costs, impairment charges, gains or losses of extinguishment of a debt, non-cash stock based compensation expenses, amortization expenses, and other infrequent or unusual items to the extent material. Any comments we make on this call as they relate to the income statement measures will be directed at our non-GAAP financial results. Accordingly, unless otherwise stated in this conference call, when we refer to gross profit, gross margin, SG&A and R&D expenses, operating income, operating margin, net income, and earnings per share, we are referring you to our non-GAAP information. I would like to turn the call over to Jure Sola, Chairman and Chief Executive Officer.

Thanks, Paige. Good afternoon, ladies and gentlemen. Welcome and thank you for joining us today. On this call today with me is Bob Eulau, our CFO, and our President typically joins the call, but today he is traveling in Asia, so he is not able to participate. Go to agenda, Bob Eulau will review our financial results for the first quarter fiscal year 2010. And then I will follow with additional comments relative to Sanmina-SCI results and future goals, and then Bob and I will open for question and answers. And now I will like to turn over the call to Bob.

Thanks, Jure. Hello, everyone -- it is a pleasure for me to be joining you on today's call. Please turn to slide three. As you can see, we started the fiscal year with a very good first quarter. Revenue of $1.48 billion was up 9% on a sequential basis. This was above the high end of our guidance of $1.35 billion to $1.45 billion and follows the September quarter when we had 12% sequential growth. Jure will discuss revenue in more detail, but we had solid growth across all segments. The revenue growth coupled with the restructuring and other cost reduction actions completed last year led to improve gross margin of 7.6% on a non-GAAP basis. This implies a contribution of 12.4% on the incremental revenue, which was in the range of the 10% to 15% we had expected. This is a good outcome and we think there is still plenty of room for improvement. As our vertical integration initiatives move forward, we continue to contain costs and we leverage our fixed-cost structure. Non-GAAP EPS was $0.23 per share. This was based on 80.6 million shares outstanding on a fully diluted basis. This was better than our guidance due to strong revenue, better mix, and higher leverage on fixed costs than we had planned. As a result of the margin expansion and good working capital management, cash flow from operations was $13 million, which is a good number given this is our second quarter in a row of strong sequential growth.

Please turn to slide four. I'll start by making a few comments on the GAAP numbers. For the first quarter, we reported a GAAP net income of approximately $59 million, which is equal to $0.74 per share. The GAAP numbers included several mostly favorable one-time events, including a $35.6 million settlement on a litigation matter and $11.6 million resolution on an outstanding tax matter. As we had expected, we also saw a significant decline in restructuring charges relative to the other quarters shown on this slide. Restructuring totaled $3.3 million for the quarter, which is down from $18.3 million last quarter. We will continue to see some minimal restructuring charges on our GAAP P&L of approximately $3 million to $4 million per quarter that relate to costs for past restructuring actions that are booked as incurred in accordance with GAAP. These expenses primarily relate to real estate which is being held for sale. We expect these expenses to decline over time as properties are sold. This property is listed on the market at over $160 million.

My remaining comments will focus on the non-GAAP financials for the first quarter. At $112 million, gross profit was up 16% over the prior quarter. Gross margin came in at 7.6%, which was a 50 basis point improvement over the previous quarter. Operating expenses of $63 million increased by $1.1 million when compared to last quarter. Operating expenses were higher than planned, primarily as a result of incentive compensation related to the strong results for the quarter. At $49 million, operating income improved by 42% over the prior quarter. Operating margin was 3.3%, which was a 70 basis-point sequential improvement. The tax rate for the quarter came in at 21.9% of pretax income. We have made good progress in reducing our effective tax rate through operational changes, and we continue to work towards our long-term operating structure with the goal of further reducing the actual taxes paid. On a non-GAAP basis, we earned $18.5 million in net income. For modeling purposes, I want to mention that depreciation was $20 million and EBITDA for the quarter was $69 million.

Now let's move to slide five. Here we are showing you some of our key non-GAAP P&L metrics. The revenue trend has been very strong in the last two quarters as we have moved out of the recession. We bottomed out in Q2 and revenues climbed 24% since then, with 9% sequential growth this quarter. Gross profit has shown strong improvements since Q2 of last year, with growth of 58%. During this period shown, gross margin has improved from 5.9% to 7.6%. We believe this demonstrates how well positioned our cost structure is for the coming quarters. While revenue and gross profit have grown significantly over the last year, our operating expenses remain well controlled. With relatively flat operating expenses and strong gross profit growth, operating profit has grown even faster since Q2 of FY 2009. In fact, it is up over four times what we had reported in the second quarter last year. During this period, operating margin improved from 1% to 3.3%.

I'd like to turn your attention to the balance sheet on slide six. Our cash and cash equivalents were $727 million. This is down primarily as a result of the early redemption of $176 million in debt. Cash flow from operations was positive at $13 million, and capital expenditures were also at $13 million. As the Company grows quickly, we are working hard to minimize our working capital requirements.

Let's turn to slide seven to discuss some of the balance sheet metrics. In our business, inventory is a key focus. It is a challenging area as the economy has improved and parts shortages have emerged. The good news is that in spite of the supply challenges, our inventory turns have rebounded sharply from 6.4 turns last quarter up to 7.1 turns this quarter. We still have room to improve, and our goal is to get up to at least eight turns within a few quarters.

In the lower left quadrant, we're showing our cash cycle days, which combine our cycle time for inventory, accounts receivable, and accounts payable. Inventory days had a very positive impact, as they improved from 56 days last quarter to 51 days this quarter. Likewise, we saw a significant improvement in accounts receivable from 49 days to 43 days. Accounts payable was unfavorable as it declined from 57 days to 54 days. Overall, cash cycle time improved from 48 days last quarter to 41 days this quarter.

Finally, the most important measure for us is return on invested capital. We have made outstanding strides in this measure over the last four quarters. We believe that this is an important measure in demonstrating our ability to add value to our shareholders. While we are pleased with on ROI of 14%, we believe there is still room for improvement with both margin expansion and better asset velocity.

At this point, I'll turn the discussion back over to Jure for more comments on the business and our guidance for next quarter.

Thank you, Bob. Good afternoon, again. As you heard from Bob, it was a good quarter. We are pleased with the progress our Company is making, and we are benefiting from our strategic transformation to a new strategy and improved operational efficiency. Good news -- as Bob mentioned, we exceeded our guidance on the top and the bottom line.

So now please turn to slide number eight. On this slide, I'm going to talk a little bit about first quarter revenue breakdown. As you can see, our overall revenue grew about 9%. We also changed the way we're going to report to you from going from five buckets to four buckets, and we also give you comparison there from the fourth quarter, so you can compare it to our first quarter. Communication overall was 34% of our revenue, and that was 9% up. Enterprise computing and storage, which includes high enterprise service and storage, was 21% of our revenue, 5% up. Industrial, defense, and medical group, which includes industrial equipment, aerospace, defense, medical equipment such as MRIs, CT machines, and renewable energy was 26% of revenue, up 8%. Multi-media which includes gaming equipment, set-top boxes, cinematography, points of sales systems, automotive electronics -- that was 19% of revenue and that was up 16%.

What is nice about this quarter is that the demand was up nicely across all of our key markets that we serve. Also, as you can see, we diversified the customer base in the market pretty well and our top 10 customers today consist of 51% of revenue and top 20 consists of 67% of revenue. Also in this quarter, we have one customer slightly over 10% of revenue. We don't expect this customer will be over 10% for a year, but for this quarter was likely over. So overall, well diversified customer base that we can build on for many years to come.

Let me talk a little bit more about the market opportunities. Market opportunities continue to be healthy. Book-to-bill for our quarter was 1.1 to one, and new business wins continue to be strong. Visibility is improving quarterly as well as outlook for calendar year 2010. So bottom line, the pipeline of new deals -- it's exciting, again. We expect to see nice growth, expansion with existing and new customer base, and also driving some new, exciting market opportunities. So calendar year 2010 at this time looks good. We're optimistic that this year will be a growth year again and continue to improve our margin and sustainable growth.

Now please turn to slide nine. Now what I'd like to do is talk to you about our outlook. Typically our second quarter, which for us is a March quarter, we see some seasonality in demand, down approximately 10%. But that's not the case this year. Our visibility looks better this year for the second quarter. So outlook for second quarter is basically following -- revenue between $1.45 billion to $1.55 billion. Gross margin should continue to improve to 7.7% to 7.9%. Operating expenses should stay flat, about $63 million. Interest expense and other should be around $27 million. Depreciation and amortization is about $22 million. CapEx for this quarter, second quarter, about $25 million. As Bob mentioned, first quarter was only about $13 million, so there is some catch-up. But if you look at for the whole year, there is no changes -- our CapEx should be about $80 million. Tax rate about 22% and hopefully lower. Diluted shares outstanding should be around 82 million shares, and for those of you that are modeling for the whole year, probably the number is going to average about 83 million shares. Non-GAAP EPS we're forecasting $0.22 to $0.27.

So in summary, again, based on our current demand and visibility, what we see today, things are looking up and 2010 should be a good year for Sanmina-SCI. However, Sanmina-SCI will continue to be cautious and I think we are ready for any economical environment. The Company is well positioned. We expect to have a sustainable margin expansion and margins will be driven by more diversified revenue growth and continued improvements in our product mix and services, cost savings from completed restructuring. As our restructuring is basically done today, we have a bright global footprint. We're in 18 countries. We do have state of art manufacturing capability and strong global engineering and design capability. So as we look at our global footprint and our operations, we don't see any major changes there. We are also well aligned with our customer base and are a valuable partner to our customers in our key focus markets. And again as I mentioned earlier, we've strategically transformed the Company to a new market strategy. And this strategy is really focusing on sustainable and more profitable business models in our key growth markets. Now I would like to take this opportunity and thank you all for joining us today. We'd also like to thank our employees for their hard work and dedication and their support. Operator, now we're ready to open the lines for questions and answers. Thank you, all, again.

(Operator Instructions). Your first question is from the line of Jim Suva with Citigroup.

Hello, it is Jason Gursky stepping in for Jim. Just a couple of clarification questions. First, you had mentioned that seasonality in the March quarter is typically down 10%. Given the current mix of business that you have today, can you perhaps provide some outlook for what seasonality and normal seasonality might look like now for the rest of your quarters?

Well, for this quarter, for second quarter, I should say, we are forecasting worst case flat through 5% plus growth. If we look at the rest of the year, everything we see today, we believe we will continue to be able to grow on a quarterly basis. This time is very hard to predict percentages. We're not ready to predict it. But as I mentioned in my prepared statements, Jason, we are pretty optimistic about the calendar year 2010. I think most importantly is that new strategy that we implemented in the last 12 months, that it is focused on diversifying market segments, focusing on our customers and projects that will allow us to have a sustainable growth and most importantly sustainable margin improvements. We feel very comfortable that as long as the economy is holding, if not major improvements, that we should continue to deliver margin improvements.

And I think in the past you have spoken a little bit about what types of margin levels you can get to on certain revenue levels. Do you have any update there?

No, it is basically the same. Our longer-term goal is to -- our model is really modeling to 10% gross margins with operating margin better than 6%, and a return on investment capital should be better than 25%. That is really the model that we want to get to. And as you can see today there is a fair amount of leverage as revenue goes up. We believe that our customer base is probably closer to $8 billion run rate than what we're shipping today. So that as long as the economy cooperates and our customers are growing, I believe Sanmina will get its share and we'll get there soon.

Appreciate the feedback.

Thanks, Jason.

Your next question is from the line of William Stein with Credit Suisse.

Thanks. First, just a clarification. That long-term goal of 10% growth over 6% operating, what revenue base do you need to get there?

Well, I think a lot of this is mix -- basically what I said in the past, as long as we could get to $1.8 billion to $2 billion run rate per quarter, we'll get there. If the mix is better, I think we can get to the lower number.

Okay. And another real quick one. What happened to the medical end market in this quarter? Did you telegraph that you were going to remove that?

No, no, medical market is -- we changed the way we're reporting four buckets, for a couple -- I'll explain my reasoning behind it. So the medical is grouped in with industrial and defense bucket, as I mentioned earlier. And so under the industrial, defense, and medical we have all industrial equipment, including semiconductor, renewable energy, which is a really growing market for us especially in the electromechanical side, aerospace and defense is of course, medical -- those businesses are very similar. They're similar in the margins, they're similar type of equipment we use to get the job done, and that's why. So if you look at all of our markets, last quarters grew up nicely. Only market that was a little bit slow for us and continue to be probably slow the next quarter is our defense market, because we have a couple of programs there slowed down. The longer term, that market is pretty exciting for us.

And one other quick one, I think in the past you've talked about a 15% contribution margin on the operating line. And clearly it was a good quarter, but I think the contribution margin was a little light of that -- we're looking at about 11.5% sequential on the operating line. What should we think about -- ?

I think I'll turn it over to Bob, but contribution margin I think for the last quarter was 12.5%.

Right.

But we said 10% to 15%. I believe that as we -- as our revenue gets to a higher level, I think that contribution margin will be closer to 15%, and also on top of it as our component business starts to have more growth, the number could be even higher.

Great. Thank you.

Thanks.

Your next question is from the line of Christian Schwab with Craig-Hallum Capital.

Thank you. Great quarter, guys. Two questions. The property for sale, the $160 million, do you have any idea or any visibility in how much of that could be sold in 2010?

Well, we like to sell everything. We have three or four properties -- basically we have in offers on them today, and they might close in the next four to five months. So I mean our internal goal is to -- right now will be at least $50 million to $60 million this year. But it all depends on the market. These are good properties and we're not ready to give it away.

Great. And then my last question, if you look at your implied -- we've discussed this before -- but your implied interest rate yield masks significant earnings for the Company, right? You only have net debt of approximately $534 million, yet you're paying close to $27 million a quarter for that, which depresses earnings by well over $1. Are we working on anything to repurchase debt or run the business with the lower cash balance and take some of that net cash to reduce the debt?

Well, let me turn it over -- let me make a comment and turn it to our CFO. First of all, as you know, we paid down this quarter $176 million worth of debt. So we lowered our debt by $176 million. We are definitely well aware of the debt that we have. I think the Company is in good position to take care of that. We don't have any debt coming in the next three years. But, yes, as we generate more profits, we'll be paying that down. So I'll turn it over to Bob.

Yes, I'm not sure I have a lot to add. We're definitely looking at what the right moves are long-term to deleverage the Company. We're repatriating cash to the US to be able to execute at the right points in time. The thing to bear in mind is that we've had two quarters of strong growth as well, so that does put pressure on us from a working capital standpoint. So we need to balance the cash requirements for the business with the opportunity leverage, and we're looking at it all the time.

Well, what is the cash position that you think that you believe you need to run your business, with the goal it sounds like at some point returning to $1.8 billion to $2 billion in quarterly revenue to support an $8 billion business? How much net cash does the Company need, Bob?

I don't think that's something that we want to talk about publicly. I mean, it's something we keep a very close eye on and I think we have pretty effective models on that front.

Well, we definitely have extra cash, let's put it that way, right now to run the business. But as Bob mentioned, Christian, we're well aware of that. I think for us right now, the way we look at this stuff, I'm personally -- yes, it is affecting our EPS, I'm really more focused today, expanding in the right project and improving the margin, and then as we do that, I think that that is going to be an easy part.

Great. Great quarter again. Thank you.

Thanks, Christian.

Thanks.

Your next question is from the line of Lou Miscioscia with Brigantine Advisors.

How are you guys? Congratulations on getting the numbers going in the right direction here.

Thanks.

When you look at obviously the numbers you just gave for the last quarter from a revenue standpoint and also for the December quarter, can you break down and help us out as much as you can -- how much of the revenue growth was from new wins and how much was the economy and programs just starting to improve and get better?

Well, all of those. First of all, if you look at -- first of all, let me talk about existing customers. The key to our existing customers that I think like our position there is that we have a lot of new programs with our existing customers. So if you just look at my communications side of the business, we're at 34% of the revenue, but most of the product that we shipped there really is the networking, high networking new products and wireless -- and wireless 3G and 4G projects. So we're well positioned with existing customers, so we were able to, one, win a lot of these new programs. And then you can go into enterprise and industrial. So a lot of our existing customers are new programs. And then last year, as you know, we reported we'd won about $1 billion worth of new business and most of that stuff was with a new customer, with a new customer that we won.

So that is helping out. And going forward, one of the reasons -- if you look at the last quarter, we won substantially a fair amount of new business. But for comparative reasons, we don't really want to report those things in the details as much as we did during the recession. The reason we did during the recession is just to show the world that we're not dead and we're working on a lot of positive things. And now when we're really focusing again on growth now and execution, I think that to respect for competitive reasons and to respect to our customers, we don't want to talk about that.

Okay. Great. Maybe then just asking a question --

But I think if you look at the lot of growth that we're forecasting for next quarter is really coming from a new programs with both existing --

Can you give us a thought on trying to get a read on the economy in general -- how would you say that the customers that were existing ones did in both the December quarter and also in March guidance?

Well, most of our customers were up in December quarter. And as we guide, worst case flat to 5% up, I think we have maybe one or two customers that are basically flat or down. Most of our other customers are moving in the right direction.

Okay.

As soon as the economy -- everything, shows me today that things are moving in the right direction. I'm not an economist, but as I said earlier, we're going to be cautious. I think we have to -- we learned a lot in the recession. And I think our Company is well positioned to adapt to any environment. And I think that's the most important part of what we learned in 2009 is that we have to be ready for any -- every environment, but in a good environment take advantage of the growth. And that's what we are focused at least in the short period of time.

Good luck on the new year.

Thanks, Lou.

Thank you.

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

Thank you. I was trying to get a sense as you move to $1.8 billion to $2 billion in quarterly revenue, how -- can you help us understand how the operating expenses need to move up? We saw SG&A move up a bit. You mentioned some incentive plans. Sounds like that is going to stay flat in the March quarter. But how much additional costs do you need to bring on into the model to hit those higher revenues?

Sherri, this is Jure. I think as we get into the let's say $2 billion run rate, I really don't see major expansion in SG&A might come out of it. Might be more out of it will be sales and marketing, some customer service, some engineering. We think we can be running at $2 billion run rate per quarter and keep our SG&A at $70 million or less per quarter.

$70 million or less.

Yes.

Okay. That's helpful. And then can you give us.

On leverage. That's what's exciting. But our new model, the type of customers we focus on is that we have a lot of leverage as we grow revenue.

Okay. And then can you -- can you give us an update on the profitability of enclosures and the components business, how are those tracking? What is the utilization in those businesses?

Those businesses are improving nicely. As you know, those businesses during the recession got hit the most. We also did a major restructuring of those businesses, so now all of those businesses are moved in a low-cost region. So they're well positioned. We're growing those things and we believe there is a lot more leverage of those. We don't break those separately, but that is one of the biggest leverages that we have -- as the demand in economy improves, we believe that those businesses will help us improve our margins, and they helped us a little bit this quarter.

Okay. So is it fair to say, trying to understand the leverage of those businesses, is it fair to say from the comment you just made that components and enclosures, the gross margins were better than the corporate average?

No, they're still below corporate average.

Okay.

But I think it is important to understand that we have both leverage in our system assembly and as we -- as the component businesses come up, there's also leverage there. So it's combination of both.

And what is your total -- what was your total utilization this quarter?

Well --

Overall?

If you look at it based on people, we're running at average 85% to 90%. Based on equipment, we're probably about 70%.

Okay.

So we still have a lot of capacity. That's why we don't need to spend a lot on CapEx in short term. We can leverage a lot with what we have.

Okay. Great. Thank you.

Thanks, Sherri.

Your next question is from the line of Alex Blanton with Ingalls & Snyder.

Hi, Alex.

Good afternoon.

Good afternoon.

I just want to ask this question that Lou asked a little differently, and that is to look forward at the demand for this quarter and the guidance, and how much of that do you see coming from the ultimate end market, and how much from expanding outsourcing from existing customers? And when I say the ultimate end market, I'm talking about the ultimate customer out there beyond the inventory buffers that might be in between, because those inventory buffers can really distort the sales on a near-term basis.

I'm very close with our customer base personally, and I think we have -- if I look at our top 20, we know much what goes on pretty well with them. But it's still very hard to forecast what's ultimate end to end demand. But I can tell you that I -- the most of the stuff that we are building today, I believe it's for direct shipment to the end customer, because these customers want it now. As you know, we have a fair amount of material shortages out there, so there's a lot of pushing going on to get this product as soon as possible. So I believe that there's a real demand out there. Yes, we had -- if you look at our inventory costs, the whole industry has been at the lowest level that I've seen in 25 plus years, but I still believe there's a fair amount of demand going on, because today none of our customers that I'm aware of, wants to bring the product and just have it sit around their warehouses. Nobody wants to carry inventory anymore. I think if industry learned anything in the last 18 months, it is that don't buy any more than you need. I think the pipeline is leaner. I think our customers going forward are going to continue to drive the lean pipeline. In other words, order what you need, don't ever have shortages, but don't have anything extra either. So that is the model that most of my customers are operating under today. It might change tomorrow, but that is the model today.

The second question, when you said how much of that demand is coming from outsourcing more. With my customer base that Sanmina-SCI focuses on, most of the stuff is -- especially on the communications side, enterprise computing, and multimedia market that we focus on, is already outsourced. There's -- more additional outsourcing is going on in the industrial and medical side of the businesses. And we see that business -- that business is going to move slowly. It is just the nature of the business. It's high mix, lower volume. Customers are a lot more sensitive because of requirement both from the medical side, or whatever. It's moving slower. But definitely even that industry has seen a huge advantage to outsourcing. Because we know this model has been proven. It does work for our customers. Especially in a tough times.

Well, when you say the pipeline is exciting, there's more new opportunities available, than say year ago or two years ago, could you tell us where those are? Are those in those new markets like industrial and medical, or even aerospace? Or if everything in the other traditional markets has mostly been outsourced, how is it that you have an exciting opportunities there?

Make sure that -- let me make sure I clarify my pipeline. Pipeline to me means opportunities that we have, existing customer base and new customer base. It's not just going out there and buying factories. First of all, we're not interested in buying a lot of factories.

I understand that.

But the pipeline is really strong from the new products that we have -- that we have, project that we've been working on, new products introduction. And then also how much we're able to get involved with the renewable energy and medical side, and some of the defense and aerospace industry that we have a strong pipeline. That's really what I'm talking about. Yes, on top of that we have medical -- I mean, we have a medical customer and industrial customers that want to outsource. But the process, as I said earlier, was a little bit slower, but we do expect more outsourcing percentagewise from that industry in the next 12 months than some other industries.

All right. Thank you.

Thanks, Alex.

Your next question is from the line of Joe Wittine from Longbow Research.

Most of my questions have been answered, but I want to hit on a couple of points that you hit on in your prepared remarks. The first was components sourcing -- you were having difficulties which is surprising based on everything we heard. I just want to see if you had any additional details on what type of components, where they're on shortage, I guess, and whether it prevented you from shipping in the December quarter?

Well, first of all, shortages, you know just as good as I do -- most of this shortage is coming from a semiconductor devices-type out there across different type from logic to, let's say, to discrete capacitors, memory. That is where majority -- especially the customs stuff. I would say that our supply chain did a really good job meeting most of the customer requirements. There were few jobs that were pushed out, which completely -- how do I say it -- there's not much we can do when there were shortages out there. But customers understood this upfront, so really there was no major impact on us. And I personally believe this will continue to be challenging at least for next 90 days. It's getting better, but it depends on the economy. We might have this type of challenges for the rest of the year, because some of the components suppliers are not adding enough capacity because they got burned in 2009. So I think they are -- they're moving slow. But I want to give a lot of credit to our supply chain working very closely with our customers and our suppliers -- I think we did overall a pretty good job.

Okay. Thanks for that. One more thing real quick. Bob mentioned in his prepared remarks when he was talking about the incremental gross margins in the business, saying there was additional mix improvement ahead due to vertical integration activity. I just wanted to see exactly what you meant by that, Bob -- are you talking about components getting more utilized and flowing through your other businesses from that?

I think it's -- your comment is what Jure said earlier. We have a big opportunity with the components businesses. They're still below the corporate average gross margin, and we think that eventually they'll be above average and we think we can shift to where we get a bigger piece of our revenue from that part of the business.

Okay. Guys, congratulations on the great guidance.

Thanks.

Your next question is from the line of Sean Hannan with Needham.

How are you?

Great, Sean.

If I can follow-up on the components topic for a little bit, first off, is there a book-to-bill you have specific for that business for the quarter?

It was better than our corporate average.

Okay. And then separately, is there a way -- can you talk a little bit about where the components business becomes increasingly more strategic? So are there specific vertical markets or segments such as industrial, defense or what have you where this capability is perhaps more important to you today, as you've readdressed your business than versus a year ago?

Well, Sean, I think the whole model is designed around focusing on infrastructure-type of product. So if you look at, let's say, communications side of the business, it is a networking wireless wireline infrastructure. These type of projects require leading edge printed circuitboard, they require large backplane, a lot of enclosure, a lot of metal, a lot of precision machining, a lot of optical components, and a lot of custom memory. We are lined up to support those type of businesses. Enterprise computing and storage is very similar. It's, again -- maybe it's not as high mix as maybe some of the communication, but requires some leading edge printed circuitboard, leading edge backplane, advanced metal and so on, and optics.

Industrial defense and medical, a similar situation. Here we have a high mix, low volume. To get into the military business, a lot of times it is tough with the bare boards. We are building some of the very exotic type of materials. We're growing the business, and the goal is to take that to the full system assembly as that industry is starting is outsource.

If you look at the renewable energy on the mechanical side, what requires a lot of machining, a lot of sheet metal, a lot of cabling -- that is the area we fill in well and the infrastructure of components is really designed to support those type of a product. Medical, same thing. If you are talking about CT machines or MRI machines, they require a lot of machining both in metal, steel, building the frames, plastics, electronics and of course, that's -- that's how we are set up.

So our vertical is really very critical to success of our model that we are trying to offering our customers end to end, Sean. And I know during the -- when Sanmina-SCI went through its major restructuring, we had to move for past reasons a lot of these capabilities from North American and Europe to the low-cost regions. So it took a long time to accomplish that. We're done with that. So the model now is all about execution and growing the businesses again. But to maximize the margins, in a model that we want to go to, where we want to be let's say a $10 billion company, and have the best industry margins, we have to have the model of vertical integration.

Sure, Jure, I follow the argument around the value-add of the vertical approach. I just was trying to determine around is there something that has changed strategically for how you've approached the components piece and how that plays into some of these segments? Or is there an increased importance around some of these things where you're going to be able to get, i.e, some better leverage, perhaps based on some of the opportunities that you're seeing?

Definitely. I think we added a lot of capabilities in our optical capabilities today that we did not have, let's say, 18 months ago. We invested heavily in, you know, leading-edge high-tech printed circuit boards. We invested -- so we have really been investing in some more leading edge to bring the technology up to be able to resolve it. At the same time, we're working very close with your customers, how do we sell more engineering, more value-add. So that strategically for us to get to the margins and to have a sustainable growth longer term, we have to connect all the dots. You have to sell it end to end to maximize that long-term relationship, and also the margins.

Okay. Thank you.

Bye, bye.

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

Follow up on -- how are you doing -- following up on a couple of questions that were asked before on contribution margins. And I guess what I'm struggling with, is you've reported two quarters in a row where your incremental gross profit to revenue is about 12% to 13%. And if we look at your objectives at $1.9 billion roughly in revenue a quarter, and a 10% gross margin, that would imply incremental gross profit of 18.5%. And I guess I'm struggling with why would we see such an acceleration in the incremental gross profit dollar to revenue relationship as you get closer to full capacity? I would think that you would actually need to expand capacity and that would actually slow down and not accelerate. I must be missing something.

Brian, let me give you a couple of facts. First of all, we're a long away from full capacity. We don't have to build new factories to be shipping $2 billion a quarter. First of all, my goal is how do I get to 1A first and then worry about getting to 2. So we can today be shipping well over $2 billion per quarter with the right mix. Of course, there is never such thing as a perfect mix. So we'll continue to invest in certain unique capabilities to expand. But I think what it is is that we believe that that our component businesses has been underperforming and circuitboards have $0.40 on every dollar contribution margin. Okay? As you get into the metal fabrication and the plastic fabrication, and backplanes and so on, contribution margin on that stuff is closer to 20%.

So it's really a mixture of a product mix that we're going after. Also, as we grow our businesses industrial and our defense businesses, where the defense margin could be three times better than our -- than typical EMS margins, and as you get to the optical margin we have been heavily investing into the engineering side of the business, so that we don't -- we do more than just putting a bunch of components on a board. And that's how all those things -- that's how you get to the margin, because we want to be a different EMS company. We purposely brought the company down to be a smaller company so that we can establish the foundation, again, and have a better control of what we want to take and generate the right financial metrics that our shareholders deserve.

On the topic of transparency, are you considering expanding your disclosures of some of those components businesses that have such high contribution margins, or no?

Well, yes, if you look at those businesses today, it is about $1 billion business -- we used to have $3 billion business in our component business. We can double that with existing footprint that we have, as we grow. So there's a lot of up-side. And I feel very comfortable -- let us get to, first of all, to a great 8% margin and get operating margin over 4%, which I think we can accomplish hopefully in -- sooner than later, and I think then the story will be more believable. At the end of the day, we have to deliver.

Thank you very much.

Thanks, Brian. We have time for one more question.

Your final question is from the line of Todd Coupland with CIBC.

Hello, Todd.

Good evening.

Save the best for the last.

Thanks. One financial question and one market question. In terms of your target model of 6% off margins, would the only thing we need to subtract from that is your $100 million plus in interest and taxes of 22%?

Yes, that's correct.

Okay. So basically the earnings leverage is, call it $3.50 to $4 a share or something like that.

Yes.

Secondly, when we listen to some of the OEMs report and give guidance for the first quarter, and they were received somewhat poorly by the market, IBM and Intel, and I just wanted to try and true that up with your optimism on the overall market. They're basically talking -- we need to get farther into 2010 to see what the markets look like. And what I'm hearing today from you guys is, we're hearing from both enterprise and consumer customers that the turn is happening and we'll see sequential growth, which will probably lead to double-digit minimum revenue growth for us in 2010. And I'm just wondering, is it just conservatism of the OEMs, or is -- your visibility has just improved that much from where it was a few months ago?

Todd, I think it's hard to compare the companies that you mentioned. These are multi billion dollar companies. Okay? We're a small company. If you look at our run rate, what we're guiding to $6 billion run rate company, and hopefully we can be bigger than $6 billion, but that is where we're at. We're not an expert on economy. I don't think anybody in this room is, even my CFO is smiling at me. I would say that everything that I can see is based on what I'm getting from our customers, and we got hit pretty bad in 2009. So we come in out of that, to put it nicely, based on information and the forecast, that we are getting from our key customers, and I -- again, Todd, this is also important of what projects you want.

Some of our customers, we have customers that to the outside world they're not growing at all, but we have a project internally they're growing 30% a year. And these are $100 million projects, for us. And it depends what programs you involve, and these are new programs or old programs. So all of these things are hard to forecast. But I feel very comfortable that our company, unless the whole disaster in the economy comes tomorrow, that we will be able to hopefully show some positive growth on a quarterly basis for the rest of 2010.

Okay. And those programs, are you willing to call out a few of the key ones, the product areas?

I can talk -- some of the programs that I mentioned we have a customer in the outside world is not growing at all, but internally we have a program $100 million and growing 30%. It is in the communications side of our business. I mean, we have programs in other buckets, too, in similar things. So we can't talk specifically about the customer. I think it's hard to compare our business to a multi billion dollar company. But even if you look at what Apple announced yesterday, they're very positive about 2010. We don't do any business with them, but they're positive.

Okay. That's helpful. Thanks very much.

Thanks, Todd.

Well, ladies and gentlemen, that is the end of our call today. I want to first of all thank you for participating. If you guys have any more questions, please give us a call. Between Paige, myself, and Bob, we will make sure we get back to you. Thanks a lot.

Thank you.

Thank you for joining today's conference call. You may now disconnect.