Sanmina Corp (SANM) 2011 Q3 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 third 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, Director of Investor Relations. Ma'am, you may begin your conference.

Thank you, David. Good afternoon, ladies and gentlemen, and welcome to Sanmina-SCI's third quarter fiscal 2011 earnings call. A copy of today's release is available at www.sanmina-sci.com in the investor relations section. You can follow along with our prepared remarks in 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 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 and slides included in -- today that we have provided you with statements of operations for the three months and nine months ending July 2, 2011 on 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 slides 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 extant material.

Any comments we make on our call as they relate to the income statement measures will be directed at our non-GAAP financial results. Accordingly, unless otherwise stated in the 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 financial 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 and welcome. Thank you for being here with us today. Joining me on today's conference call is also Bob Eulau, our Chief Financial Officer.

Good afternoon, everyone.

On agenda we have for you today, is that Bob Eulau will review our financial results for the third quarter. Then I will follow with additional comments relative to [Sanmina-SCI's] results and our future goals. Then Bob and I will open it up for question and answers. Now I would like to turn the call over to Bob. Bob?

Thanks, Jure, and welcome again, everyone. It's a pleasure to be on today's call. Please turn to slide three. Overall, the third quarter results were better than we expected. Revenue of $1.67 billion was up 7% on a sequential basis, and up 3% over the third quarter last year. This was at the high end of our guidance of $1.6 billion to $1.7 billion.

Our gross margin came in at 8%, which is up 50 basis points from the second quarter. Operating margin also improved 50 basis points from last quarter to 3.9%. Non-GAAP EPS was $0.42. This was based on 83.1 million shares outstanding on a fully diluted basis. Non-GAAP EPS was above the range of our guidance, which we set last quarter. Finally, cash generation was strong this quarter, with cash flow from operations of $51.3 million. I will discuss cash and our capital structure in more detail in a few minutes.

Please turn to slide four. Revenue was up 7%, or $105 million from Q2 to $1.67 billion. From a GAAP perspective, we reported net income of approximately $7 million, which results in earnings per share of $0.09. This was down relative to last quarter and Q3 last year, primarily because of debt extinguishment costs of $18.3 million associated with the debt refinancing that we completed during the quarter.

Restructuring costs totaled $6 million for Q3. Restructuring was a little higher than normal this quarter due to the organizational change that was announced in Q2 and completed in Q3. Looking forward, we will continue to see some ongoing restructuring charges on our GAAP P&L of approximately $3 million to $4 million per quarter that primarily relate to real estate which is being held for sale. This quarter, we sold about $15 million in real estate. We have property listed on the market at over $100 million.

My remaining comments will focus on the non-GAAP financials for the third quarter. At $134 million, gross profit was up $17 million, or 14% from the prior quarter. Gross margin came in at 8%, which was 50 basis points above the previous quarter. Gross margin was above plan, primarily due to good execution in several factories and ongoing progress in the components business. Component gross margin was above the corporate average, and the highest level it has been in several years.

Operating expenses were up $4.7 million for the quarter, at $68.6 million. This was a couple million dollars higher than we planned, which was primarily related to increased accruals for bonuses. At $65 million, operating income increased by 22% from the prior quarter. Operating margin was 3.9%, which was a 50 basis point sequential improvement. The tax rate for the quarter came in at 16% of pre-tax income, which is also in line with what we had expected. On a non-GAAP basis we earned $35.1 million in net income, or $0.42 per share. Both net income and earnings per share were up about 40% from Q2.

On slide five, we are showing you some of our key non-GAAP P&L metrics. As you can see, Q3 revenue was strong after a disappointing Q2. Compared to Q3 last year, revenue was up 3%. We also saw a nice rebound in gross profit in Q3. Our gross margin improved to 8%, which is slightly higher than where we were a year ago. It is reassuring that we accomplished this result while revenue in our high-margin defense business was down from last year.

Our operating profit improved 22% to $65 million from last year. This led to an operating margin of 3.9%. EBITDA also recovered nicely from last quarter at $89 million, which was 5.3% of revenue. For modeling purposes, I want to mention that depreciation and amortization were $25 million for the quarter.

Now I'd like to turn your attention to the balance sheet on slide six. Our cash and cash equivalents were $583 million dollars. Cash was down $72 million from the previous quarter, primarily due to the repurchase of $80 million in debt and the expenses associated with the refinancing of $500 million of debt during the quarter. Accounts receivable increased by $73 million, mostly due to growth in revenue. Collections performance was solid again, just slightly below our record last quarter. Inventory increased by $66 million which I will discuss more in a moment. Accounts payable increased by $104 million for the quarter, which is primarily due to better linearity in material purchases and growth in revenue.

Let's turn to slide seven to discuss our long-term debt situation in more detail. We completed a $500 million, 7% bond offering due in 2019. The proceeds, along with $80 million of our excess cash, were used to buy back all of the remaining $380 million of 6 and three-quarters bonds due in 2013. And $200 million of the $600 million 8% bonds due in 2016. The transaction allowed us to increase the average life of our long-term debt outstanding from 3.4 years to 5.7 years, as well as make a meaningful reduction in our leverage. At this point, our next long-term debt is not due until 2014.

In conjunction with the transaction, we swapped the entire 2019 bond from fixed to floating rate. The swap rate will reset quarterly, but currently is in the area of 4.25%. The swap, along with the debt pay down, allowed us to reduce our net interest expense in the third quarter by about $2.5 million. On an annual basis, when compared to our net interest expense prior to the refinancing, we expect to save about $20 million.

Please turn to slide eight. Our cash position remains strong given our potential cash needs. The decrease in cash this quarter is largely attributable to the refinancing and debt pay downs that I just discussed. Cash flow from operations was $51 million. Net capital expenditures for the quarter were $13 million. The net capital expenditures included $15 million in asset sales during the quarter. This led to $39 million in free cash flow.

Inventory remains a key focus. Inventory increased from $820 million last quarter to $886 million this quarter, while the inventory turns improved slightly from 7 to 7.2. In the lower left quadrant, we are slowing cash cycle days, which combine our cycle time for inventory, accounts receivable and accounts payable. Inventory days were down 1.4 days when compared to last quarter at 50.5 days. We saw a decrease in accounts receivable day sales outstanding from 56.4 days to 54 days as a result of improved collection terms and better mix.

Accounts payable was slightly favorable as days payable outstanding increased from 53.2 days to 53.7 days. Overall cash cycle time decreased from 55.2 days last quarter to 50.8 days this quarter. Finally, ROIC recovered nicely to 15.8% for the quarter. We expect ROIC to improve over the next few quarters.

Please turn to slide nine. I'd like to share with you our guidance for the fourth fiscal quarter. Our view is that revenue will be in the range of $1.65 billion to $1.7 billion. We expect the gross margin will be in the range of 7.6% to 8%. Operating expense should be around $67 million. This leads to an operating margin in the range of 3.6% to 4%.

Assuming no foreign exchange surprises, we expect that other income and expense will be in the range of $21 million to $22 million. We expect the tax rate to remain in the range of 15% to 17%, and we expect that our fully diluted share count will be in the range of 83 million to 84 million shares. When you consider all of this guidance, we believe that we will end up with earnings per share in the range of $0.40 to $0.44. Finally for your cash flow modeling, we expect capital expense to be around $25 million, while depreciation and amortization will be around $25 million as well.

Overall, we were pleased to see our financial performance back on track this quarter. At this point, I will turn the discussion back over to Jure for more comments on our target markets and our business strategy.

Thanks, Bob. Good afternoon again, ladies and gentlemen. As you heard from Bob, this was a good quarter for us, and I am pleased with the progress our Company made in the third quarter.

We are continuing to benefit from our strategic transformation to a better business mix and higher operational efficiency. Our technology components continue to deliver better margins. Definitely, things are moving nicely in the right direction. In the third quarter, this business delivered a higher margin than the corporate average, as Bob mentioned. We also expect these businesses to continue to bring higher leverage to the top and the bottom line.

Now please turn to slide 10. Let me review end markets with you for the third quarter and also talk about our outlook and demand for the fourth quarter. We'll start with communication, that represented 48% of our revenue. That business was up approximately 8.6%. Overall, we had a good demand existing in new projects, with some weaknesses in our optical products, and other products came in per our expectation.

As we look in the fourth quarter, we expect this business to be slightly up, maybe flat. We continue to diversify new products with existing customers and also focus on our new accounts. We believe this market still has a lot of opportunity for us because we're we'll positioned in it.

Enterprise computing and storage represented approximately 14% of our revenue in the third quarter. That was nicely up 10.7%. Overall, we had a strong demand, again driven by existing and new projects. As we are looking at the fourth quarter of fiscal year 2011, we also believe this market segments will be slightly up. We believe we have stable demand for next quarter, and also, we continue to have some good opportunities going forward.

Industrial defense and medical represented approximately 24% of our revenue. That was slightly up; I would call it flat. Medical was up. Industrial, slightly up. Defense and aerospace was weak during the quarter. As we forecast in the fourth quarter for this segment, we expect it to be flat, slightly down, mainly driven by defense and aerospace, we expect it to continue to be weak. Also semiconductor capital equipment business is expected to be weak in our fourth quarter. Medical, industrial, we expect those two segments to continue to be stable in demand. Long term, we are very optimistic about this segment, and well focused on it.

And the last segment, multimedia, represented approximately 20 -- I'm sorry, 14% of our revenue. Third quarter was nicely up, 8.4%. Overall, good demand.

As we look into the fourth quarter, we are forecasting slightly up. Basically, this group we expect to continue to see stable demand. Also overall, as Bob mentioned quarter-to- quarter growth in total was 7%. Our top 10 customers represented 50.2% of our revenue. We also had one customer, approximately 10%, which came from communication networks.

Now let me talk to you a little bit more about environment -- business environment for the fourth quarter, and I will also mention a few things for the December quarter, and that's mainly our first quarter of fiscal year 2012. Bookings in the third quarter were positive, 1.05 to 1. Our customer forecast for fourth quarter are looking stable at this time. We also have a good pipeline of new opportunities. As we look out further, visibility looks fine for the December quarter, again, that's our first quarter of fiscal year 2012.

Now let me make a few comments relative to current economical environment. Current economical environment will continue to be somewhat choppy in the short term. As we remain cautiously optimistic about end markets, it is difficult to predict what impact the market environment will have on our customers. As a result of new programs and new customers, we have offset these markets and customers that remain soft. We have been able to stabilize our business. In this environment, we will continue to focus on items within our control and deliver exceptional products and services to our customers, making Sanmina-SCI the partner of choice.

I'd like to also make a couple of comments regarding our world diversified portfolio of products and services. We're breaking this down into basically four groups. Technology components includes two businesses. Interconnect system includes high technology premium circuit boards, back blends and cable assembly. Mechanical system group includes enclosures, plastic precision machining, all the mechanical systems. Both of these businesses are well-positioned for margin expansion.

The second group, what we call products, includes four business; defense and aerospace, optical modules, memory modules, solid-state drives. And fourth business it's for enterprise computing and storage, joint development, and all the end products. In these four businesses, we continued to invest more in research and development and sales and marketing to drive the future revenue growth and margin expansion.

And the last -- the largest part of our business, what we call electronic manufacturing and global services. Let me make a couple of comments on electronic manufacturing. [Again], well positioned. We continue to focus on complex system build, including build-to-order and configure-to-order. We have plenty of capacity here for growth, and we don't have to put a lot of investment as we grow and do [focus on] margin expansion.

Another part of this business is Sanmina Global Services, which includes repair and logistics and other customer services. We are well focused here and our goal here is to grow and expand this business. So basically, our strategy is working. I believe we are in good position. Our long-term plans remain intact. We are focused on driving sustainable growth and margin expansion in each of our businesses.

So in summary, overall, a good quarter. I am pleased at our operating performance, but still we have more opportunities here. More work to be done before we will be fully satisfied. Again, a lot of leverage in our business model for both top and bottom line.

Sanmina is well-positioned to compete in our diversified portfolio of products and services and focused key markets and customers. These diversified portfolios should allow us to continue to provide the best technology and manufacturing services to our customers. We are also cautiously optimistic about this economy, and at this time, we still expect to see good growth in fiscal year 2012.

Now I would like to say thanks to all of you for your support and the time you're spending with us today. Operator, we are now ready to open the line for questions and answers.

Yes, sir.

(Operator Instructions)

And your first question comes from the line of Wamsi Mohan of Bank of America.

Hello, Wamsi

Mr. Mohan, your line is open.

Let's go ahead and move onto the next one, please.

Your next question comes from Jim Suva of Citi.

Thank you, Jure, and congratulations to you and your team. That operating margin is very impressive.

Thanks, Jim. I think we are moving in the right direction. A lot of work left, but things are going the right direction.

So my question I have is actually in that work that you plan on doing. When we look at your sales outlook and your operating margin outlook, it basically looks like your operating margins are not going to see more improvement, were at the same level. Is that just because now it's driven more by top line sales growth? Or I'm wondering, are the components operating at the optimal level? Or how come we are not going to expect to see some more margin improvement here? To be honest, it's better than what I thought it was going to be this quarter. I am just wondering, is there more to go, or it looks like we're actually starting to level out here?

Well definitely, we believe that we have a lot of opportunities, as I just said in the prepared statements. Operationally, things are moving in the right direction. But the job is not done. Let me give you a couple of highlights.

I think the biggest pressure on margins today in the short term is the weakness in our defense and aerospace business. And we believe that's going to continue to be weak. When it comes to the components and other products that we have, there is a lot of leverage left. Our component business is not at the optimum yet. They have a long way to go. They're all profitable; that's positive, but we have a lot of opportunities there. So the way I look at it in the short term is to continue to make improvements, assuming the economy is going to cooperate for us.

But the longer term, our goal is to deliver the leading-industry margins. If I look at the circuit board business, we are not there where the industry leaders are. On mechanical systems, we are moving the right direction, but a lot of room left. And so on and so on. So Jim, the way I would summarize it, still a lot of opportunities, and that's what we are really focused on.

Great. Thank you. For my follow-up, there was a news announcement that [Han Hi] is buying the set top box business from Cisco. And I know you guys in the multimedia sector do some set top box business. Is that a sector that you get a little bit more concerned that it may get a little more aggressive on pricing? Or how should we think about that from the competitive landscape, Jure? Thank you.

That sector always was in very aggressive when it came to the pricing. So I don't think there's anything new, today. I think for us, we're going to continue to focus on the key customers that we have. I believe we have a very strong solution that we provide to these customers. We are going to continue to focus on that. But we don't see any impact on this deal between Cisco and Sanmina-SCI.

Congratulations to you and your team, Jure.

Thanks, Jim.

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

Yes, thank you. Jure, with some of the communications networks business outlook of flat to slightly up, can you talk about some trends by the sub-segment within that marketplace, areas of strength and maybe weakness?

Could you be more specific when you say soft segments?

So, networking, optical, wireless infrastructure, just trends.

Well, yes. What we have in that segment is networking wire on wireless. I would say it depends on customer to customer, but overall, I would say the wireless for us is very strong. Networking, we have some customers are very strong; some are a little more flat. Wireline overall is performing very well.

At this time, we are very positive on this market. The way we are positioned, the customer base, we're just a little bit more cautious.

Okay. As a follow-up, can you talk about -- you mentioned choppy short-term macro, but customer forecasts are stable. Any update on Japan, really how that played out? Was it in line with expectations, and really where you stand today, post Japan?

Well, first of all, when that disaster happened, we worried a lot. We took a lot of steps to minimize that impact, both from a customer side and us. We worked together on some major projects. I think we survived pretty well. Definitely there was an impact, but going forward, I believe it's less and less. I don't really see any major impact on us when it comes to the revenue or any other things at this time.

Okay, last one if I could, for Bob. There was a nice cash flow in the quarter. As you go forward, can you just talk about the use of cash, whether it's further deleveraging or any M&A opportunities and what you plan to use the cash for?

Yes, hello Craig. It's basically what we've said in the past. First and foremost, it's to continue to have the cash we need to grow the business and run the operations. Secondly, we will look at small, very strategic acquisitions that really allow us to continue down the strategy that we have. And then the third use is deleveraging like what we did this past quarter, and we will continue to look for right points in time to do that as well.

Okay. Thank you.

Thanks, Craig.

And your next question is from the line of Sherri Scribner of Deutsche Bank.

Hi, thank you.

Hi, Sherri.

Hi, how are you, Jure? Just thinking about your growth expectations going forward, it looks like the midpoint of your guidance suggests that fiscal 2011 revenue growth will be about 4%. Just trying to understand is that the revenue growth rate that you would expect going forward for the Company?

Well, first of all, our internal goal is a lot higher than that. We're not ready to forecast 2012, except what we see today, we think there's going to be a growth year. We would expect what we have in our pipeline to meet double-digit growth in 2012, but I'd really like to reserve that to the next call.

Okay. That's fair. And then looking at the operating margin, I think in the past you talked about hitting the 5% operating margin, which is your goal by the end of the calendar year. I don't know if those expectations have changed, but with the September guidance, it looks like you are a little bit far away from doing that in December. Do you still expect to do that, or can you give us some sense of how that happened?

When I made that statement, that was about two, three quarters ago. Really, our defense business at that time was performing well. We have a very weak defense business today, which is our highest margin business. So definitely, it will be a challenge for us to hit those numbers in December.

As I mentioned earlier, when Jim from Citi asked that question, we feel still confident that in our strategy that we can get our long-term goal. And I think when it comes to that, getting to the 5%, definitely the answer is yes. It's just a timing issue. But we are really more focused driving all the businesses now to their highest margin.

We believe that we can make up the weaknesses that we have in the defense business. Because I believe that defense will continue to be weak, at least in the short term. But we have a lot of leverage in our component businesses, which we are really, today refocused, and I believe in a good position to expand the margins.

We also said, as I mentioned earlier, we created what we call product group, which consists of the four key businesses going forward. I believe that those products, basically, it's an ODM and including defense product will contribute a lot.

So I like the position that we're in. I think it's the best position our Company has been in the last 11 years. I think we have a lot in front of us. Our customer relationships are very strong. I believe we can grow with existing customers. It's just going to be all what happens to the economy. If the economy cooperate, which I believe it will, we have a lot of exciting things in 2012.

Okay. So it sounds like defense being weak makes it more difficult, but you expect to offset that in other areas over the next couple of quarters.

We're going to work very hard to find a way to offset that, yes.

Great. Thank you.

Thanks, Sherri.

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

Yes, good evening. So a question around the components business. Is there a way, Jure, you'd provide a little bit of color during the call, if you can help to elaborate around what you're seeing within your specific business for business trends there, have a book to bill for that group of businesses performed and the book to bill, what it looked like for the quarter versus the rest of the Company?

Yes, we don't Sean, give those numbers out. As I said earlier, for the whole Corporation, it's 1.05 to one. But our overall businesses are pretty similar. As you know, a lot of these components that we build going into the assembly, that we build or sell to other companies out there.

So the business overall is, I would summarize, yes, we have some choppiness with customers up and down. But I think there is enough in the pipeline that we feel comfortable about the forecast. And I think we think that's going to continue nicely in December quarter.

So we'll take two quarters at a time; we'll see how things shake up. But we are focused in our component businesses, Sean. We are investing a fair amount into the business development. We created a lot more focus on that part of the business, and we want to grow our businesses, our higher margin businesses. That's the whole idea for our model, and we changed our strategy two years ago that we are going to build a different Company.

And I believe that today, we're putting all those things together that everyday hopefully will be a better day for us. And that's what we feel internally.

Jure, in the absence of a number, is it at least -- is there at least a way to get a sense of directionally, whether those bookings were better than a Company average?

I would not say they were better than the Company average. I think we're close to the Company average.

Okay. So when we look at the pieces of those -- of that components business in the aggregate, we break down the pieces, is there a way, if can give us at least maybe a little bit more color because each of those certainly carries a different margin profile? Is there a way if we can get a sense of what you feel is on path to perhaps exhibit some stronger growth as we go through the remainder of the calendar year, perhaps a little better visibility around the margins?

Yes. Sean, let me go back to what I said in my prepared statement. All these businesses are not -- or maybe, the first question that is being asked, are not performing at what they should be performing. So for example, if you look at the circuit board industry, a great company out there delivering around 15% operating margin. Believe me, we are not close there yet.

If you look at mechanical systems, a great company delivering well over 4% margin. So none of these businesses are there yet. Now all the restructuring, all the hard work, all the management changes, now that is all behind us in that part of the business. So really for us, it's more than just how fast these businesses are growing. Because in the short term, I think we have plenty of businesses to continue to improve the margins.

We are really more focused, where are we going to be in those businesses six months from now and a year from now. Because our goal is to bring everyone of these businesses to become a leader in our industry when it comes to the margins. I think technology we have; now it's all about rebuilding this, loading these plants up to it's maximum, and maximize the margins around the world.

So our model is not just because even if we had a business today, it doesn't mean we will be able to deliver those industry margins that we want to deliver. But I think as we look further, I believe we are moving the right direction. But it's profitable; every one of our businesses is profitable.

Thank you, Jure.

Thanks, Sean.

Your next question is from the line of Shawn Harrison of Longbow Research.

Hi, good evening. Just maybe to reconcile something with the book to bill at $1.05 for the quarter -- the guidance, essentially a little bit more flattish. Did you see the book to bill get closer to parity as you exited the quarter and into July?

First of all, I don't think book to bill tells you everything. I think it's more -- we have a lot of businesses -- it is all really driven by the forecast. Some customer gives us a forecast, we have a contract, they will give us a forecast for a whole year, and then gets updated on a weekly, monthly basis. So the demand is for us, is more driven by the forecast than just the bookings.

Okay, that's fair. In case I missed it, the gross margin's expected to be down sequentially. Is that a factor of mix? I know that it was mentioned that you had some facilities do very well in the June quarter, maybe the sequential potential for gross margin decline?

We're just giving a range. We're not planning to have lower margins. We are just giving the range. It's hard to forecast in any environment, so our goal is to find a way to make improvements.

I guess if gross margins were to decline sequentially, is there one factor, quarter-to-quarter, that's going to be different, either mix or commodities or something of that nature?

The mix makes a big difference in our business. So driving our -- now more diversified portfolio that we have and really when you look at Sanmina -- what comes from components, what comes from products, what comes from EMS products? So the mix is very important. Even in that mix is the customer. Some customers we make more money; some customers we make less money. So the mix is the really the most important part.

Okay that's fair. Thank you very much.

Thanks.

And your next question is from the line of Lou Miscioscia of Collins Stewart.

Hello, Lou.

Yes. Hopefully I'm coming through okay. If you could you go into the grouping that you talked about. You went through it a little bit quickly. What's really different now is the way that you're trying to go to market, and I don't know if you can help us break that out. You've given numbers of different component areas in the past.

Yes. We used to run a Company in one bucket basically. All operations were in one bucket, trying to maximize it. We separated those in groups, so that's why we have a technology components group that includes two businesses. It's an interconnect system, which includes high technology premier circuit boards, back planes and cables; and mechanical systems which includes enclosures, plastic precision machining, and we have some mechanical system ODM, some ODM racks. So that's what we call the technology component group.

Those two groups, are today, are in a very good position. They're making improvements. A lot of room to grow, but they are making improvements, so we expect the margins to hopefully improve on a daily basis.

Then we created a product group. We have defense and aerospace. As you know, we provide a high-end product that it's a Sanmina design to get in the government for Army and Marines and some other products that we are developing.

And then we have an optical module. We acquired a Company where we build a custom module, we can design it and manufacture it for our customer; it's basically a joint development type of a product.

And then we had memory module business for a long time. We have really grown that and expanded it, including solid-state drives. So that businesses is also in a very good position.

And about a year ago, we just got serious about really investing and expanding our enterprise computing and storage product, focusing mainly on joint development with our customers in ODM. As I mentioned on those prepared calls, we're really investing a fair amount more in R&D. Just if you look at year-over-year difference, it's almost a couple million dollars more per quarter than before. And also we are spending a lot in sales and marketing to really drive and grow these businesses.

And then of course, our traditional EMS business in a third bucket, and also that bucket consists of really of two businesses. Our EMS business, which includes build-to-order and configure-to-order, and our what we call Sanmina Global Services, which is basically repair logistics and other customer services. That business, we're really focused on that trying to grow it and expanded it.

So that's how we manage this today, Lou. And each of these businesses competes by itself. And I think we're in a really good position. Like I said earlier, we're in the best position we've been in the last 10 plus years to compete with anybody in those segments.

And can you give us a rough idea about the size, and will you officially actually break out the numbers for those over time?

Not at this time. We're going to review this in the future, how are we going to report it. But at this time, we will continue to report in one bucket.

Then it's fair to say none are over 10%?

Yes, individually, yes it could be more than 10%.

Okay. Thank you.

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

Great. First, congratulations on lowering the cost of the debt. Could you break out for us the segment -- what percentages is roughly of your revenues comes from semi-cap equipment, of the --?

We don't break that. That bucket itself for us, I believe it's 24% of our total revenue. Our biggest -- it's not the biggest part of the market, but it's a substantial amount. But I think it's -- if I look at that market, it's a temporary slowdown. If you look at the forecast of some of those equipment and some of the projects that were involved, we expect the business for us to continue to do well, especially as we go into 2012.

So would you, following up on that commentary, would you expect the semi- cap equipment revenue to be up in Q4? Or would you expect that recovery in the business to be more of a Q1 event?

Right now, I would take it one quarter at a time. I mentioned earlier that we expect the market in the fourth-quarter to be down, which is our September quarter. So make sure that's clear. So September quarter, our fourth quarter, we expect business to be down, slightly down.

So the commentary of the customer base is obviously the same as it is with the investors, that they do expect it to be a pause and then pick up?

Yes, I would say that's a fair assessment, if I had to use one word.

Perfect. Thanks again, and congratulations again on the debt. Thanks.

Thanks.

And your next question is from the line of Amit Daryanani of RBC Capital Market.

Thanks. Good afternoon, guys. Hi. Just a quick question. On the multimedia side, your expectation is business to be flattish in September? Normally, I think you see a pretty good ramp in September heading into year-end season. Is there a reason why you aren't seeing that uptick this time around?

No, I said slightly up.

High single digits, but almost 10% range heading into year-end?

I don't know if I want to be that specific because to be honest with you, I can't be that specific. But overall, if you look at our guidance, we're guiding $1.65 billion to $1.7 billion, I would call that slight flat or slightly up. And so it really makes this all our business, some businesses will be up; some are down. I don't really want to focus on multimedia alone.

Got it. And I may have missed this, if you'd just clarify. OpEx looking up, more than what you guys are expecting for June quarter. What drove that exactly in the quarter?

Amit, it's Bob. That was really driven primarily by increased accruals for bonuses.

That's it. Thank you.

Thanks, Amit.

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

Hello, Brian.

Hello, Jure. Just to confirm what you said earlier on the revenue segmentation, it sounds like the only segments that you expect to be down sequentially in September are defense and semi-cap equipment. I am just wondering how big of those businesses? I know somebody just asked about semi-cap. Because I'm surprised that if the majority of your business is up, I think everything else you said should be up a little. Why the overall revenue guidance for September is not up as well?

Well, I think we are guiding it slightly up, number one. Number two, defense and semiconductor together are a big part of that 24%. So it does affect. But at the same time, in other segments, if you look at our communication networks, we have our customers that are down. We have some other ones that make it up, and so on. So it's really a mix of the bunch of little things, Brian, that affect the quarter.

And then just back to the components business. Could you talk about which part of that portfolio improved the most in terms of probability sequentially? Or was it really across the board? And then, was the improvement that you saw volume driven, or was it more execution related?

We're not going to break it down, because we don't release that information. But I think these are the businesses that, as you know, have a fair amount of issues. We believe a lot of those issues are behind us. So it's really more execution and getting the better product mix on this.

If you look at our optical -- the memory module business, we have made a tremendous job in the last four months going out for the better product mix and also introducing a fair amount of new technology to the market. Our mechanical system made some nice improvement last quarter as we also saw some good improvements in some of the plants in the circuit board business.

So all of these things are starting to add up. And most important, I believe these businesses have momentum to continue to make improvements. Not to the level that we want it to be, but we believe that things are moving in the right direction, and they should continue to leverage to the bottom line.

Right. You said there's a long way to go. If you had to take a stab at what percentage of the way there we are, to where you want to be --

As I said earlier, it's better than corporate average, okay? But we're talking about corporate average is 8% gross margin, and these businesses should be producing well over 10% operating margin. So that's why I say a long way to go. I think if you look at Sanmina today, you really have to look at it differently. All the hard work is done. If you look at the overall Company, we have a lot of capacity left. We don't have to buy a lot of equipment to grow a lot. But growth alone is not what we are really driving.

We're really building a different Company. I hate to use the word old Sanmina, but we are really a lot more disciplined when it comes to focusing on the mixes that will give us the sustainable growth and be able to deliver the margins that are different than typically in this Company.

I know it's a long way to go, but that's really what we are focused on. And these components and products will let us get there. At the same time, when we look at our EMS businesses, we're going to focus on the high-end, high mixed type of products, even an EMS, that allows us to do better. And we are growing this plant by plant.

So there's a lot of work to be done to hit the results that we are looking for. So what I'm trying to say here, and what I've really been saying is we are not happy with these results. And there's a lot of work left to do. We like the work that we are in, and we expect to make good improvements. We should be making a lot more than $0.42 a share.

Makes sense. Thanks, Jure.

We have time for one more question.

And you're final question comes from the line of Wamsi Mohan of Bank of America.

We just waited for you, Wamsi.

Thanks for sneaking me in, Jure.

No problem. For whatever reason, you were the first one here, according to the operator, and then you disappeared on us. So it's good to have you back.

Well, thank you. My question goes back to the defense program that caused the weakness in the prior quarter, not the latest reported one. Are (inaudible) this product, Jure? Do you have inventory of this product? And are you still confident the government will take possession of these products, and that there won't be any write-downs associated with these?

Well, we feel anything can happen in anything. So this can happen to any product that we have today. Based on anything that we know, of course, we have some inventory. But everything that we know, we believe we are in a good position to ship everything we have.

Okay. And you are continuing to manufacture this product? It's just the uptake from the governor is at slower rates than it was before?

Well, it's a lot slower than it was before. It's a lot slower. Plus we have some new products that we are also introducing to the market that hopefully will be replacing some of this older stuff. But you never know how it's going to take off, and so on.

So we are going to play very conservative on that side of the business, and but we feel very confident that's the business we are going to focus on. That's why we separated and created a new division, brought a new President. So a lot of exciting things in front of us. But a lot of work left.

Okay, thanks for that, Jure. And then one question for Bob. Bob, you mentioned that bonus accruals were the delta between the higher OpEx versus guidance. To some degree, you obviously have some clarity around what those accruals are going to be. So how should we think about -- Jure also made some comments around increased R&D to drive future growth. So what should we be thinking around over the next few quarters from a stable OpEx level?

Well, on the R&D side, we have increased it quite a bit over the last year. And I think you'll see some ongoing modest increases there. From the other area of SG&A, I would expect it to be relatively flat.

Okay. Thanks a lot.

Well, ladies and gentlemen, that is all we have for today. If you have any more questions, please don't hesitate to give us a call. Again, thanks for your support, and looking forward to talking to you 90 days from now.

Thanks, everyone.

Ladies and gentlemen this does conclude the Sanmina-SCI third quarter final fiscal 2011 earnings call. Thank you for your participation. You may now disconnect.