Sanmina Corp (SANM) 2011 Q1 法說會逐字稿

Good afternoon. My name is David and I will be your conference Operator today. At this time I would like to welcome everyone to the Sanmina SCI first quarter fiscal 2011 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 Ms. Paige Bombino. Ma'am, you may begin your conference.

Thank you, David. Good afternoon, ladies and gentlemen, and welcome to Sanmina SCI's first quarter fiscal 2011 earnings call. Today's call is being recorded and is posted along with a copy of our Earnings Release and a slide presentation on the quarter at www.sanmina-sci.com in the Investor Relations section. You can follow a long with our prepared remarks and the slides posted on our website.

Please turn to page two, the Safe Harbor Statement. During this conference call, we may make projections or other forward-looking statements regarding future events or the future financial performance of the Company. We caution you that such statements are just projections. The Company's actual results of operation 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 change. We refer you to our quarterly and annual reports filed with the Securities and Exchange Commission. These documents contain and identify important factors that could cause actual results to differ materially from our projections or forward-looking statements.

You'll note in our Press Release issued today that we have provided you with a Statement of Operations for the three months ending January 1, 2011 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 is posted on our website. In general, our non-GAAP information excludes restructuring costs, acquisition and integration costs, non-cash stock based compensation expense, amortization expense, and other infrequent or unusual items to the extent material. Any comments we may make on this call as they relate to the income statement measures will be directed as our non-GAAP financial results. Accordingly, unless otherwise stated in this conference call, when we refer to gross profit, gross margin, operating income, operating margin, net income and earnings per share, we are referring to our non-GAAP information.

I would now like to turn the call over to Jure Sola, Chairman and Chief Executive Officer.

Thanks, Paige. Good afternoon, ladies and gentlemen. Welcome to Sanmina's conference call. Here with me today I have Bob Eulau, our Executive Vice President and CFO.

Good afternoon, everyone.

Also, Hari Pillai, our President and Chief Operating Officer.

Hello, everybody.

So the agenda is that Bob Eulau will review our financial results for the first quarter and fiscal year 2011 and then I will follow additionally with some comments relative to Sanmina SCI results and future growth. Then Bob, Hari and I will be open to answer all of the questions that you might have.

And now I'd like to turn it over to Bob. Bob?

Thanks, Jure. It is a pleasure for me to be joining you on today's call.

Please turn to slide three. Overall, this was our seventh consecutive quarter of improved operating margin. Revenue of $1.66 billion was down 1% on a sequential basis and up 12% over the first quarter last year. This was at the high end of our guidance of $1.625 billion to $1.675 billion. Gross margin was unchanged from Q4 at 7.8%. This was below what we had planned, primarily due to the mix of business where revenue declined. Operating margin improved 10 basis points from last quarter to 4.2%, which is a good outcome since this was achieved in spite of slightly lower revenues in Q4. Non-GAAP EPS was $0.45 per share. This was based on 82.8 million shares outstanding on a fully diluted basis. Non-GAAP EPS was above the range of our guidance, primarily because of lower operating expenses.

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 $28 million which results in earnings per share of $0.34. This is down slightly from Q4 and up significantly from last year once you adjust for last year's one-time events totaling $48 million which consisted of proceeds from a legal settlement and the resolution of a tax matter. Restructuring costs totaled $5 million for Q1. The restructuring costs were significantly below what we had planned due to lower costs than expected for the strategic acquisition of an optical business last year. The integration of this business is now complete and the business is ahead of our plan from a margin standpoint.

For Q2, we expect restructuring costs to be in the range of $5 million to $6 million. After the second quarter, we will continue to see some minimal restructuring expenses 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. These properties are listed on the market at over $130 million.

My remaining comments will focus on the non-GAAP financials for the first quarter. Revenue was down 1% or $25 million to $1.66 billion. At $129 million, gross profit was down 2% from the prior quarter. Gross margin came in at 7.8% which was flat with the previous quarter. Gross margin did not meet our expectations. The biggest challenge was the components area where revenue was down in most categories. The contribution margins are generally higher in the components business, so a decline in revenue has a disproportionately negative impact on gross profit.

Operating expenses were down for the quarter at $60 million. This is down primarily due to a change in estimate for bonus expenses that were previously accrued. We expect operating expenses to return closer to recent levels of around $64 million next quarter. At $69.3 million, operating income improved by 1% over the prior quarter. Operating margin was 4.2% which was a 10 basis point sequential improvement. This is a solid outcome given that revenue was down by 1%. The tax rate for the quarter came in lower than planned at 16% of pre-tax income. Based on our current profit mix assumptions for FY11, we believe our FY11 tax rate will be in the 15% to 17% range. On a non-GAAP basis, we earned $37.3 million in net income.

On slide five, we're showing you some of our key non-GAAP P&L metrics. As we expected, revenue growth has slowed in the last couple of quarters after very strong growth last year. But nonetheless, we started this year with our Q1 revenue up 12% over last year's first quarter. After improving dramatically in the first half of last year, gross profit has not met our expectations. While revenue and gross profit have grown over the last year, our operating expenses actually declined in Q1. With a significant decline in operating expense and a modest increase in gross profit, operating profit has grown 42% since the first quarter last year. During the last year, operating margin has improved from 3.3% to 4.2%. EBITDA was up 35% over Q1 last year and flat with Q4. Our EBITDA for the first quarter was $93 million and our EBITDA margin was 5.6% for the first quarter. For modeling purposes, I want to mention that depreciation and amortization were $25 million for the quarter.

Please turn to slide six. Our earnings per share improved dramatically since the first quarter of last year. In fact, EPS has almost doubled since the first quarter last year. EPS was down slightly from last quarter, mostly due to business mix and higher taxes which was not quite offset by lower operating expenses.

I'd like to turn your attention to the balance sheet on slide seven. Our cash and cash equivalents were $549 million. Cash was down $44 million from the previous quarter for several reasons, which I will summarize in a moment. Accounts receivable declined by $16 million, mostly due to better revenue linearity than last quarter. Inventory declined for the second quarter in a row by about $11 million. The most significant change in the balance sheet related to accounts payable which was down $84 million. The primary issue with accounts payable was the fact that we received a high percentage of material early in the quarter. This issue was driven in part by the delivery of components that had previously been supply constrained.

Let's turn to slide eight to discuss some of the balance sheet metrics. Our cash position remains strong given our potential cash needs. The major reason for the decline this quarter was accounts payable, which I previously mentioned. The decline in accounts payable was partially offset by accounts receivable and inventory. We also used $12 million to pay down short-term debt during the quarter. Cash flow from operations was negative $2 million and net capital expenditures were $28 million for the quarter. The net capital expenditures included $5 million in real estate sales during the quarter. This led to a negative $30 million in free cash flow.

Inventory remains a key focus. Inventory declined for the second quarter in a row but our inventory turns remained flat at 7.3. 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 are showing cash cycle days which combine our cycle time for inventory, accounts receivable and accounts payable. Inventory pays were flat when compared to last quarter at 49.9 days. We saw an increase in accounts receivable day sales outstanding from 51.8 days to 54.7. This was primarily driven by mix and term changes. Past due AR was very good.

As I mentioned earlier, accounts payable was unfavorable as it decreased from 55.1 days to 52.4 days. Overall, cash cycle time increased from 46.5 days last quarter to 52.2 days this quarter. Finally, return on invested capital was 16.5% for the quarter. This was adversely impacted by the accounts payable situation I described earlier. We don't like to have this measure decline but it's still well above our cost of capital. We expect ROIC to improve over the next few quarters.

In summary, this was a challenging quarter but we were still able to deliver solid operating margin and EPS in spite of the sequential decline in revenue. As you'll hear from Jure, we expect modest results in the first half of the year. Our early look at the second half continues to be very positive from both a revenue and an operating margin perspective.

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

Thanks, Bob. Ladies and gentlemen, I would like to add a few comments relative to the first quarter results and the future forecast. Number one, I'll talk about the revenue break down by end markets, talk about our second quarter outlook, and I'll give you a business update and visibility for calendar year 2011. And then Bob and I and Hari will open for Q&A.

So now please turn to slide nine. Here, I'm going to review the first quarter break down but also give you a forecast for second quarter, what we call March quarter. First of all, the top 10 customer has a full 49% of our revenue. We also had two customers that were 10%-plus. They are mainly coming from communication and networks. But let me make a comment more in detail in each of these markets. First of all, communication networks consisted of 48% of revenue. Here, we are focusing on networking, wireline and wireless infrastructure type of product. This group grew approximately 3.5% quarter-over-quarter. Networking and wireless business continues to be very strong for us. If you just compare it on a yearly basis this business grew approximately 60% year-over-year. As we look at the second quarter, in the long term we still look at these markets to be very strong. For the second quarter, we forecasting at this time flat, maybe slightly down on the revenue point of view.

But let me give you some more insights for the rest of the calendar year 2011. We believe this market is going to continue to grow strongly in 2011. And this is mainly driven by some of the changes that are going on in the market. There's a lot of changes in new technology. So if you just look at some of the latest products that will be shipping, like in optical side of our business, 40G systems, that is doing really well and we continue to introduce now 100G systems. Those type of systems will continue to drive the revenue for us for the rest of 2011 and beyond. Also the rollout of the 4G, LT rollouts, what we call in industry. We're well involved there. A lot of good customers. So we expect that type of technology to contribute to our revenue as we look in 2011 and beyond. If you look at the whole group here, we're well diversified. Not just by the products itself but also the customers that we are involved. We offer very strong value to our customer as we continue to invest in the new technology that will allow us to continue to gain market share in this side of the business. Again, we are winning the new businesses and these businesses are all about the new technologies that's going to drive communication networks markets for us for many years to come.

Now, let me talk to you about enterprise computing and storage. Last quarter that was approximately 13.5% of our revenue. First quarter was down 2.7%, if you look at the quarter-over-quarter comparison. Demand, if you look at it in this market for us, and last three quarters was weak, mainly driven by old programs. Some of these programs are going to the end of the life. As we look in the second quarter, I believe this business is going to start to stabilize so we'll forecast second quarter as flat to potentially up. We expect also to see nice growth in calendar year 2011, mainly starting the third quarter and beyond. And this will be driven by the new programs that we have been winning in the last two or three quarters. Also, Sanmina has introduced in last six months our own product and storage product, what we call CDMA, custom designed product ODM. This is for high end storage boxes. We're starting to ship this product and we think we've got a pretty good demand going on if you look at 18 months out. So we believe it's a good future opportunity for us.

If we look at the whole market, what we call enterprise computing and storage, which is the high end of the servers and storage product, we believe this group will play a bigger role for our growth in 2011 and beyond than it did in the last four quarters.

Now let's go now to industrial, defense and medical. There was 24.6% of our revenue last quarter and there was also quarter to quarter basis slightly down, about 1.7% down. In that group, we have a medical, defense and aerospace and industrial. Let me talk to you about each of them. Medical actually was very strong for us. On a quarterly basis that was up about 9%. Industrial was flat, thus it was really the only business that was down and it was down about 20%. The main reason it being down last quarter, we have some existing program that the demand was pretty weak last quarter. So as we forecast second quarter, I would call that group to be flat, potentially up. Defense and aerospace business we're forecasting up next quarter. Industrial also should go slightly up, and medical we'll say will be slight, maybe slightly down. I think medical for next quarter, to me, it's more timing than anything else.

But let me also make a little bit more comments on what we see the rest of the year. As we look at the third quarter 2011 and calendar year 2011, this group should continue to grow nicely, as I said, starting in the third quarter. Driven mainly, again, by medical. In medical, we should see a strong demand for diagnostic imaging product, patient monitoring systems and respiratory products, and other products that we have been working on in 2010. So we won a lot of new programs in 2010 in the medical and I believe those things will start helping us improving the revenue in 2011. Industrial, mainly focus here on clean tech and semiconductor products. I believe we're well positioned here. We have a lot of good opportunities in front of us and we expect the calendar year 2011 to continue to expand.

Back to the defense and aerospace, again we expect this business to start to improve next quarter. But we hopefully based on our plans and what we see sequentially each quarter we should see some improvement, and hopefully exit the calendar year 2011 in a lot better position than what it is today. So a lot of focus in here because our defense and aerospace business has a lot of potential. And I'll talk about it later more on that.

Multi-media was approximately 14% of our business and last quarter that business was down about 14.4%. In that group, multi-media group, we have automotive, set top boxes and some other equipment there, what we call multi-media. Automotive actually was very strong. But I would say the rest of the multi-media products, we had a few, two major customers, that temporary their demand is pretty weak. So as we look at the next quarter, we believe this business will be flat, mainly driven by automotive. Automotive should be nicely up. The rest of the businesses we don't see major recovery in the multi-media until second half of our calendar year 2011. I think it's mainly, as I said earlier, weak demand with a couple of our customers there, but we do expect that business to turn around. So it's a timing here for us more than anything else at this time.

Now I would like to turn to slide 10 and I will talk about our outlook. As Bob mentioned, we expect that these first two quarters to be flat when you compare them to the fourth quarter of our fiscal year 2004. But we're starting to see a good demand in the second half. So revenue outlook for the second quarter is $1.62 billion $1.67 billion. We expect gross margin to move in the right direction, 7.9% to 8.1%. Operating expenses should be around $64 million. Operating margin should come in between 4% and 4.2%. Interest expense and other should come in around $26 million to $27 million. Depreciation/amortization is about $25 million. On CapEx, last quarter we spent about $28 million. This coming quarter, the second quarter, we're planning to spend about $30 million for equipment, mainly for new equipment. And for a whole year, we're still planning to spend around $100 million. Tax rate should be in a range of 15% to 17%. And diluted shares outstanding should be approximately 83 million to 84 million shares. And we are also forecasting non-GAAP EPS of $0.40 to $0.43 next quarter.

What I'd like to do now is really give you a little bit more insight of our business, what's going on and visibility for calendar year 2011. 90 days ago when we had this conference call, I think at that time we were a little bit concerned about the economy, what we were hearing from our customers. But I can tell you that we feel a lot better about the global economy today. I'm not an economist, as you know that, but I can tell you that visibility and the forecasts are giving us more confidence about the calendar year 2011 than what we had 90 days ago. Outlook for us is more positive. Our first quarter results and second quarter results support our view of a flat first half of our fiscal year 2011. And the second half of our fiscal year 2011 we see stronger forecasts and expect to deliver revenue growth and nice margin expansion in third quarter and remainder of fiscal year 2011.

Our strategy is working. We still believe there are long term goals for operating margin of 6%-plus is attainable. And I believe -- we talked about it last quarter -- that if the economy continues to improve, we believe that we have potential to exit calendar year 2011, which is the December quarter for us, with operating margin for our total business around 5%. We still believe that today. And I know there is some question out there how Sanmina is going to get to these numbers. So what I'd like to do is share with you some of our key points from our strategy, how we are going to get there, how we are going to meet our goals.

First of all, our strategy is differentiated. We've been working now on this strategy. And this is not just shutting down a bunch of manufacturing plants around the world and say, this is a new strategy. Our new strategy is really focused on projects that will drive more sustainable growth, and deliver or look for opportunities that can deliver us better industry margin. So that's the key focus. Focusing on key markets, providing leading solutions, and partnering with our key customers. I think we accomplished that and I think we've got a foundation that we can build on that.

We also have been developing our component capabilities. I know there's a lot of focus strictly on circuit boards but we have really widened our component technologies. And let me give you some highlights. We're providing leading component technology solution to these key markets and these key customers that I'm talking about. So, for example, if you just look at the optical components, two years ago we had basically zero revenue in optical components. Our revenue in optical components today is approximately $500 million-plus run rate. So great accomplishment. We took some time to invest in these businesses. We're building these businesses. And they are starting to deliver some good margin. But they have a lot of room for growth to hit what I'd say the industry margin goals, and I'll talk about it later on.

High printer circuit boards (inaudible), yes we had some challenges.I think today it's all about the growth and growing these factories that we have, and we continue to invest in some of these key technologies. Enclosures, including precision machining and frames, well positioned globally in that. We continue to expand our memory modules which today not just focus on the memory modules but also has its own product that focus on solid state drive, what we call internally SSD solution. As I mentioned earlier, defense business for us, what we call defense and aerospace, is very critical to the future of this Company. But we are improving on the strategy that we had there for a long time, is we're expanding the products here, not just focusing on EMS services. So we've been shipping our products to this market directly to the end-user. We continue to invest so we are really changing the model in our defense and aerospace business.

I mentioned about it earlier, we introduced fair amounts of product in our storage and server business, what we call custom design and ODM products. We believe that we have a good potential there. And other products that I'm not even ready to talk about today. So we are building a different EMS Company than what Sanmina was in the last five years, going back what I would call to the roots where we are focusing on the strong customer relationship, offering the unique technology, and really focusing on the products that will make us a different Company. So we are also focused, as I said, on a long term product mix to make sure we improve those. Traditional EMS, yes, but in those traditional, we're going to focus on the key markets and the key customers that have requirements for high end, higher technology products. I just mentioned technology components group, DAS and aerospace, again, and some other CDMA and ODMA products that will be coming to high end markets.

So if you analyze what's the margin potential in these businesses, I think we as an industry, we all have a little bit different strategies, we all have different strengths and weaknesses, and we focus where we have our strengths. When it comes to the margin, margins are driven by markets. We, as the suppliers to those markets, we basically adjust to make sure that we can compete in those areas where the customer is willing to give us a chance to grow in those higher product lines. So, for example, if you look at EMS, high end technology products, the companies out there that are doing this, and we are doing it ourselves in certain products, those type of margins should be around 5%-plus.If you look at technology components companies, including optical components companies, high end printer circuit boards, high end (inaudible) they are delivering operating margin 8% to 10% industry today. If you look at the custom design products, especially for high end stuff, that is about 10% to 15% operating margin. And then after market services, operating margin is 6% to 10%.

So those are the businesses that we are uniquely positioned and we are driving these margins to that level. And that's why the way we focus and what we are doing today, we have more confidence, assuming the economy cooperates with us, that we have a pretty good chance to exit calendar the year 2011 around 5%.

But let me give you a couple more comments, what are the key drivers for our margin expansion. Again, as a management, we have to continue to improve our efficiencies. We are working very hard to improving our mix, and sustainable revenue growth. It's a combination of mix and revenue that is sustainable for many years to come. Continue to leverage our components and expand our components and grow what it needs to be. There's a lot of work still to be done, and we know that, but we believe that it's still the right strategy to continue to move in that. And, of course, continue to utilize our capacity. As you know, we do have extra capacity around the world. So if I analyze the whole product lines, both from EMS components and products, I still believe there's a lot of work done in each of these fields, but we are very confident as a management that every one of these businesses will see nice growth and nice financial improvements in calendar year 2011.

So in summary, I am optimistic about our future, and I believe that we're well positioned to grow revenue and achieve our operating margin and EPS goals for fiscal year 2011. So, now I would like to again thank you all for your support and time today. I would also like to take this opportunity to thank our employees for their hard work and dedication and their support.

Operator, we're now ready to open the lines for question and answers. Thanks again.

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

Thank you, and Jure, congratulations to you and your team. A question for you. In the press release you've made a comment in the text about, to obtain or achieve your operating margin and EPS goals for 2011. Can you just quantify the operating margin and EPS detailed goals of what specifically you're saying? I know in your comments you'd mentioned you think you can exit the year with operating margins of 5%. Is that what you were alluding to in your text?

Yes, yes, I think that's what I was alluding to. Our goal -- you see the guidance.We delivered 4.2% operating margin first quarter, we're guiding now 4% to 4.2% second quarter. We believe that everything that we see today, that the third quarter demand is up, even today the visibility is good. So today unless the whole world changes the third quarter is going to be a lot better than the second quarter, and based on that our operating margin should move in the right direction. And based on all of the data, we believe the fourth quarter will continue to move, and we are expecting to have a pretty strong first quarter 2012, which is our December quarter. And if you do the math, I really believe that we think we can hit that around the 5%. We have to. I know we've been talking about it. Nobody is going to believe us until we deliver it. So that's what we're saying.

Great. And then my quick follow-up, Jure, is, one of your indirect customers on the semiconductor equipment side, notably an indirect customer, Intel guided significantly higher for capital expenditures for this year. I believe at about $9 billion and most people were expecting about $5 billion. And on this call so far I haven't heard you talk a whole lot about semiconductor equipment. You talked a lot about optical and other areas. Is semiconductor equipment just less of a focus today?

No, no, no. I'm glad you brought that up. First of all, semiconductor equipment, I think we're well positioned. About five or six years ago, we went and expanded in the machining, precision machining, precision plastic, precision frames. So we have one of the leading industry capabilities for semiconductor industry. The reason maybe I'm not highlighting it is because it's a business that we had for a long time. We're well positioned so I try to focus more on the new one. But you're right. I think, as I said in my prepared statement, and I'm saying, in industrial, semiconductor and clean tech, that's really what I would call three groups, what we call industrial that we are focused on. Semiconductor, I think we are well positioned with all of the key players, and we expect to have a nice growth in 2011. It was pretty strong the beginning of 2010 and then things for us maybe what I would say flattened out at the end of 2010, but I believe that third quarter on we should see a little bit more pick up in that side of the business.

Thank you and congratulations to you and your team.

Thanks for your support, Jim.

Your next question comes from the line of Wamsi Mohan of Merrill Lynch.

Yes, thank you very much. Hello, guys. I wanted to ask a question about the ODM design, particularly the one that you're referring to in high end enterprise storage. Can you share any details around this ODM design that makes it differentiated? Do you have any customers testing this now?

Yes, first of all, we're partnering with another key software company out there that I can't talk about. We're providing a high end design. It's one of the maybe, I would say, the biggest unit that is offered by independent ODM company out there, is being well received and we are getting orders on this. And this product is going to some big players in the industry.

Can you talk about the revenue opportunity in the margin profile of this?

Revenue, any of the projects like this, unless we at least, couldn't think at least $100 million-plus, we wouldn't even talk about it. But the margins on this unit, it should be, we're not interested getting the custom for ODM type of products where we can deliver operating margin better than 10%. It's not worth the investment for us otherwise.

Okay, thanks, Jure. And I have a follow-up. The gross margins came in a bit lower. You mentioned that components business had some lower volumes, but were there any other follow-up costs, execution issues you alluded to last quarter, or are those well behind you now?

I think last quarter we had a one-time issue. As Bob mentioned, and I'll have Bob add to it, but definitely, the revenue. But I think, of course, we could have, there's some other issues that we could maybe do a better execution. We are a manufacturing company, there's always little things we could do better. So when you ask the direct question, yes, we could do better everywhere, including some of the components. But I am very confident about that business, as I said in my prepared statements. And I think if you look at the fourth quarter, demand for components, because there's a fair amount of inventory with our customer base that we believe that also will have a higher pick up in the second half of the calendar year 2011.

Thanks a lot, Jure.

Yes, I don't have a lot to add. I think mix within components was a challenge. As I mentioned, revenue had a pretty significant impact there. And mix on the EMS side, while EMS did pretty well overall, mix could have been a little better there, as well.

And your next question comes from the line of Christian Schwab of Craig-Hallum Capital.

Great. Thanks for taking my question. And Jure, and management team, thanks for a lot more information than maybe has historically been provided. Just a little bit more information, if I may though. You talked about, in essence, 86% of this quarter's revenue, that being communication networks, enterprise computing storage, defense, industrial, medical, that we have new program ramps and we expect strong growth from that portion of the revenue in the second half, if everything comes together, as you expect. So, just to make sure all of us are on the same page, does that mean that you think that revenues year-over-year in 2011 can be double digits plus? Or is that recovery of growth just mean a return to low to high single digit revenue growth and it comes up with a number closer to 7% to 9% revenue growth? How should we be thinking about that, given the increased visibility?

If you just look at the first six months, if you compare it to the year ago, it's going to grow about, could be as much as high as 9%, 10%. So I would say our internal forecast today is probably the low double digits for right now. It all depends on how the program comes in. If some of these programs come a little faster, then they can be moved up. We're driving internally to grow 10% to 15%, that's the goal. I don't see anything today that I can tell you we can grow 15% in fiscal year 2011, but I think we feel pretty confident that we have a potential to grow single digits. Single -- I'm sorry, double -- 10%-plus.That's my problem, see.

I get it. Just to make sure that we're all crystal clear on what you guys were saying, I understand that we're driving for 10% to 15% growth. But given the visibility of the program ramps that you have, it's not unrealistic for us to assume that you have a 9% to 11% year-over-year fiscal year 10% to 11% revenue target is what you're looking for. And if those programs are stronger, it could certainly be better than that. And if the economy rolls over and tanks it will obviously be less. Is that fair?

Yes.

And just to summarize, we believe, and we've been saying for a while, we think low double digit growth is achievable this year. And there's nothing that tells us that's not the case at this stage.

Fabulous. No other questions. Thanks.

Thanks Christian.

Your next question comes from the line of Craig Hettenbach of Goldman Sachs.

Yes, thank you. Hello how are you?

Very good.

Jure, just a follow-up on the comments on the better macro than 90 days ago. Anything, whether it's Company -- customer forecasts or by end market that gives you the increased confidence that growth is going to be improved this year?

Yes, about 90 days ago, I think what we saw, at least with our customers in a project that we had, we had a strong drive in the third quarter, and at the beginning of the third quarter things look like that's going to continue. And then the end of the fourth quarter, as some of these projects somebody put the brakes on, and we just worried at that time. Like I said, I'm not an economist, but you read papers every day, you listen to the experts and it was scary news. I would say what we've seen since then, number one is that customers are more optimistic than they were, let's say, in November time frame. Also the forecast, which in our case, that's what we look at is the forecast. If you look at them today, our visibility for third quarter today is probably better than what we've seen for a long time. Would you guys-- ?

Yes, and I would add to that is important, is program wins that we've already won in the last couple of quarters that we'll expect to contribute in a meaningful way in the third and fourth quarters.

Okay, and then on the margin front, Bob, as you guys talk to a 5% potential exiting calendar year, does that mean that you can keep the OpEx, SG&A and R&D around flattish at $64 million or so? Or how should it trend through the back half of the year?

Yes, so from an OpEx standpoint, we really don't see much growth there. Little, if any. I think this quarter was a bit of an anomaly but assuming $64 million and then slight growth, I think, is reasonable for the year.

And all increases there as we are starting to make more money, we'll probably have to reserve a little bit for higher bonuses for our people. That will drive a little bit, but I would say I agree, I don't think major changes.

Okay, and any update on just component availability today and any constraints in any areas?

I'll turn it over to Hari.He does this every day.

Yes, sure. Towards the start of this past quarter, so in the January/February, sorry in the October/November, we saw some softening of improvements of supply conditions. So generally I would say that conditions are improving.

Okay, got it. Thank you.

Thanks Craig.

Thanks.

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

Yes, good evening.

Hello Sean.

Sean.

So, since a large part of your story is really the return of components and the margin contribution that's there, perhaps if you can share with us a little bit around what you saw for bookings or book-to-bill for that business in the quarter. And then if you can provide a perspective, secondly, the level of growth that perhaps you expect to see in the back half of the year based on what you know for your current bookings and ramps?

Let me give you a little bit longer answer on that one. First of all, the book-to-bill was slightly down. Especially because of the holidays, a lot of our bookings came in the first week of January, if you can count -- because January was flat, up. But because of the holidays, we had a shut down a week-and-a-half at the end of the year, a lot of the bookings came in the first week of January. So I think it comes back to the components. And the reason I spent a little bit more time talking about it today is that we expand in our components. Because our strategy is really to not strictly depend on assembly alone. And a few years ago, a majority of our revenue was assembly, that was a key focus. But the new strategy, we basically, final system integration is just end of it. What we want to do in this critical system is to provide as much technology as possible where we have a competitive advantage. So we don't have competitors trying to focus on some of these high volume stuff. But if product requires a lot of technology, a lot of global logistics, very difficult to install, very difficult to test, very difficult to build, that's where we fit in.

So, we expanded our technology to fit and support our market. So the reason we went to optical business, pretty soon our optical components will be bigger than our circuit board business. Not today, but it will be. Because we believe those are the type of technology, if we're going to compete in a telecommunication infrastructure, which is for us networking and wire line, wireless, you have to offer some unique capabilities. So we've grown our optical businesses, we invested in it. And we spent a lot of money investing in it because, as I said earlier, two years ago we didn't have much. Today, that business is well over $500 million and growing, and I believe has an opportunity to one day, to be delivering 8% to 10% operating margin. Because there's a one competitor, it's a small public company, I think they are about an $800 million company, if you look at their operating margin, they are already delivering, I believe, about 10% operating margin.

So that's why some of these businesses we are expanding because I believe that long term, that's how we get to that 5%, 6%. Otherwise I don't think we get there. So you're right. These components are very critical to us. When it comes to the growth, as I said earlier, I think we're going to expect a little bit more growth in the second half for these high end components because I think the combination of demand and also what's in pipeline inventory. So I hope I answered your question.

Yes. So we don't have a book-to-bill number now for this December quarter, and I suppose that's fine.

I'd just say it's slightly-- it was slightly low.

Down?

Because a lot of the bookings came in the first week of January.

Right. Okay. But if we were to look at that piece of your business, it appears, when I try and reconcile the back half of the year revenue ramps, new programs, the consideration of that, and that we perhaps have some better penetration in terms of design with your components into some of those, and then the goals of executing at an operating margin around 5% or better, it sounds to me like there should be better revenue acceleration around your components business than the rest of your business. And is that a bad conclusion?

No, you could be right but let me put it that way. Let us go through the second quarter, and I think 90 days from now we can give you a little bit more details at that time, because I think we'll have a lot better visibility in April what's going to go on the rest of the year. But we're pretty optimistic. But again, also, Sean, remember, a lot of these components that I'm talking, these are all high-end components. You have to get qualified, it takes a long time. And it's good and bad. Once you're into these critical projects, you really have to screw up to get disqualified. So getting qualified it's a must, and that's really -- so we've been investing fair amounts of time and money in the last year or so to make sure that we're in these key programs that are coming up.

Sure, I follow. Terrific. Thanks, Jure.

Thanks, Sean.

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

Hi, thank you.

Hi, Sherri.

Hi, how are you, Jure?

Great.

So, you mentioned a number of new program wins ramping in the second half of the year. I think you mentioned medical is one area where you see some substantial programs ramping. What other segments are you seeing specifically where you have new programs ramping?

The medical was good. We brought in, I think 10 to 15 new customers last year. And that's in addition to our core. We have a very strong core customer base in medical. We have a couple players that maybe their business was flat. So bringing this new medical accounts, I think, is going to help us grow that business in the future.

We have industrial, there's a lot of opportunities. And the reason I don't want to be talking too much about industrial because it's a longer process. The stuff that we do in industrial, which is typical industrial product, clean technology, semiconductor products, these are all what we call internally big and ugly. These are large systems, a lot of machining, a lot of metal, high end special electronics and so on. So there's a lot of opportunities there that we are working on and there's a lot of projects. And we are hoping that's the right investment for us because we've been spending a lot of time with that customer base, so fair amount of new programs.

But back to communication networks. I think there, I would say we're best positioned ever with our existing key customers and also the emerging customers that we've been doing some business with but that business can now double and triple. So we have a lot of opportunities in the communication networks. And, most importantly, we are also diversifying that, that we're supplying a lot of product. It's not just the one program. That goes across all of our components that we also supply. So we're excited about that one.

Enterprise computing, like I said, that was kind of a dead market for us in 2010. We are working very hard to drive that up. And I think we have enough confidence that the worst is behind us on that market. Only market that I would say for us this year that is in multi-media that I can say flat, down, and I think in automotive and multi-media it will do fine, and some of the high end cameras that we do will do fine. But there's some other products in the multi-media for us that might not, like I said, not have a lot of demand probably until the second half of the calendar year 2011. And I want to be perfectly clear that we did not lose any of the customers or projects in that group. It was just more about the demand of our customers, that a lot of inventory that we've built ahead, if you know, that business for us was very strong, first nine months of a calendar year 2010.

Okay, that's extremely helpful. And then in terms of you talked a lot about your strategy and that you're targeting the higher end markets. I guess I'm curious, who are you seeing as competitors in those markets? It seems like a lot of people are talking about trying to address higher margin opportunities, but I wanted to know who you're competing with?

First of all, just like any other customer, Sherri, there's a lot of different competitors, large and small that want to play in these markets. I personally believe it's about focus and what solution you are bringing to this market, if you're going to be winning the orders or not. I believe that our culture is to be able to perform on a high mix, lower volume business where they are very challenging to do around the world. We've got to understand, Sanmina yes, we are a $6.5 billion run company today, but we've got a global infrastructure when it comes to the IT capabilities at plants, just like at one of our biggest competitors. Actually, our IT systems, I don't know exactly how they are, but let me put it this way. There's no programs out there when it comes to IT systems or manufacturing capabilities that we cannot do. So we have a huge advantage to be able to focus on these niche markets, but allows you to do globally.

Medical is a perfect example. If you look at a lot of our medical growth, our customers' biggest growth is going to be in the third world countries -- China, India, some other Southeast Asia third world countries, Eastern Europe. And that's the area that we can give them a complicated solution and give it to them on a units of one, where some of our big players are really not focused. So I'm not saying they can't do it, but our business, what we are focused on, is all about focused technology and execution.

Okay, great.

So you have to be afraid of everybody but you just got to do a better job.

Afraid of everybody. Okay, thank you, Jure.

Thanks, Sherri.

Your next question comes from the line of Amit Daryanani from RBC Capital Markets.

Hello, Amit.

Hi, how are you guys doing?

Good, good.

So maybe I didn't get this part, but component revenue sounds like they were down sequentially in December. It's a quarter I think component business should be up. So can you talk about what drove that business down? And secondly, specifically on the PCB side, I think last quarter you had a couple of internal issues. Have those been resolved?

I think for us, I think many of the demand was the inventory, like I said. I think, just to look at the customer base that we have, that were driving extra inventory because a lot of the shortages, especially type of the high end systems that require few very expensive components that are hard to get, and so what do you drive? You've got to have a premier circuit board, you've got to have an optical component in order to do it. So I think inventory.

And the second question, the issue that we have, it was really the management issue locally that we have. We replaced the management. We sent two individuals from North America that's been with us for over 25 years. So it's just building around the management which is challenging all the time, but I think we've got it fixed.

Got it. And then just on the component side, again, it sounds like it was down because of inventory correction and you're convinced that it's probably one more quarter where it stays flat and then it bounces back. What gives you comfort the inventory correction wouldn't sustain for a couple more quarters?

I think it's more by, as I said earlier, I'm not -- it's hard for us to always know exactly what inventory is, but I think we have a pretty good idea. It's really based on the forecast. I'm really giving you, our forecast is based on what we are seeing today for third quarter. And I can tell you that if we can ship everything in the third quarter, what is forecast for the third quarter, will be a lot bigger than the second quarter.

Got it. And then just my final thing, to achieve a 5% operating margin target, what's the revenue run rate do you need to be at to get there?

Amit, I'm glad you asked that question. We always go this internally, and my friend over here, Hari Pillai, says -- well, when I go play golf, if I can hit birdies, I'll be the best golfer. If everything was perfect, believe me, we can do a lot more than we're doing. Okay. I believe that -- we know.We're smart enough to know not every project, not every operating operation around the world is going to be always perfect, but we believe we can improve the margin even at the flat revenue. So that's one. The second thing is, of course, growing the right revenue and also expanding these programs that I just talked about earlier.

Got it. But you don't want to come out with a revenue target or bandwidth that would get you to 5% now?

No, I don't think it's necessary. I think if we ship extra 5% next quarter or whenever we ship that, you should -- if it doesn't fall to the bottom line something is wrong.

Fair enough. Thanks a lot.

All right, Operator? We have time for one more question.

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

Hello, Brian.

Hello, how are you?

Very good.

Thanks for taking the question. So just to clarify what your expectation is in the components business. So the margin issues here were related to revenue softness that were driven by component constraints, as well as the lingering effect that you had from an issue last quarter where you replaced the management team. And so going forward you expect the component constraints to ease and that's going to drive margins in the components business up, and that's primarily why you're looking for gross margins to improve overall for the Company next quarter?

I think that's just one of them because that's -- just to give you an example, the comment that you're making, in one of our circuit board factory, Malaysia, that is one issue. But I have other circuit board divisions that are delivering today, operating margin probably around 12% to 13%. So there's -- that's just the one issue. We have, in the components and EMS, as Bob said, we can make improvements in a lot of places. So it's a combination of a lot of things that we've got to do in order to hit that. But not everything, as I was joking earlier, not everything has to be a birdie.Not everything has to be perfect in order for us to continue to improve these margins.

But given that you're expecting gross margins to go up sequentially, when you're looking for revenue to be basically flat sequentially, the key swing factor, for the March quarter at least, is better profitability in components. Is that?

I think March quarter -- we are guiding 0-- I'm sorry 4% to 4.2% in operating margin. We just delivered 4.2%, right, Paige?

Yes.

Yes.

And so we want to deliver the highest possible margin there. So we look at this quarter to be flat. I think for major margin improvements, we expect it in the third quarter, but hopefully we build a stronger foundation in the second quarter that will allow us to hit what we need to hit in the third quarter.

Okay, and then just a couple follow-ups. The comment about hoping for low double digit growth in FY11, is that organic or does that include the benefit of the Breckenridge acquisition?

That includes the Breckenridge.

Okay.

But everything else should be organic. We might pick up small strategic projects here and there, but there's no, we don't have anything now planned for anything major.

So it seems like you guys have been very successful with new wins. So how much of that low double digit growth, if you were to get there, do you think would be driven by new wins versus just growth in the existing business?

First of all, I think it's most important to keep what you have. And if you just look at the communication network, what we call, there's a lot of new technology, it's existing customer, in some cases it's existing projects, but the new technologies coming in. So as you are building existing products, you've got to make sure you win the new program, new technology products. So that is the most important. And the second most important is that you add new customers -- right new customers with the right projects.

Okay. And then just finally, the enterprise computing business, it's been down more than 20% year-over-year for the last couple quarters. It looks for the March quarter you're expecting it to be down close to 20%. The end markets for computing are actually doing quite well. It doesn't sound like you're actually losing customers. So I'm just trying to understand what's driven the performance. And, more importantly, why are you so confident that this business is going to turn around and drive double digit growth?

First of all, we had, if you just look at the last three quarters in that business, we had a lot of old programs, end of life programs, actually driven by few customers. And we believe a lot of those old programs are now end of the cycle, some of the new programs are helping out. We believe our own storage box, the high end storage boxes that we are introducing will help us out. And as I look at all the customers and the projects we're working on, I just believe it will be more positive than 2010.

Okay. Just on the opportunity to refinance debt, any update there?

Bob.

We obviously continue to look for opportunities to de-lever the Company and we are paying attention to what's going on in the high yield market. But there's really nothing to announce.

Can you just be a little bit more specific on what you're looking for and why in this kind of environment there wouldn't be a huge opportunity to replace some of the debt that you have?

The first debt we have that's due in 2013 has a coupon of 6.75%, so that's not bad. So we have to keep an eye on what are the alternatives, and we're going to move cautiously forward and continue to delever. We paid down a little bit of short-term debt this quarter and we'll continue to see fluctuations in terms of how we manage that.

Thank you.

Okay, Brian. Thanks a lot. Ladies and gentlemen, that's the end of our call today. Hopefully we answered most of your questions. If not, please give us a call. Again, thanks for your support. Bye-bye.

Ladies and gentlemen, this does conclude today's conference call. Thank you for your participation. You may now disconnect.