Sanmina Corp (SANM) 2011 Q4 法說會逐字稿

Good afternoon, my name is Michelle and I will be your conference operator today. At this time, I would like to welcome everyone to the Sanmina-SCI fourth quarter and fiscal year end earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session.

(Operator Instructions)

Thank you, Ms. Paige Bombino, Director of Investor Relations, you may begin your conference.

Thank you, Michelle. Good afternoon, ladies and gentlemen, and welcome to Sanmina-SCI's fourth quarter and fiscal year end 2011 earnings call. A copy of today's release is available on our website in the investor relations section. You can follow along with our prepared remarks in the slides posted on our website.

Please turn to page 2, the Safe Harbor statement. During this conference call we may make projections or other forward-looking statements regarding future events or the 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 operations may differ significantly as a result of various factors including the state of the economy, economic conditions in the electronics industry, changes in customer requirements and sales volume, competition, and technological 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 issued today that we have provided you with a statement of operations for 3 months and 12 months ended October 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 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 expenses, and other infrequent or unusual items to the extent material. Any comments we make on this call as they relate to the income statement measures will be directed at our non-GAAP financial results. Accordingly, unless otherwise stated in this conference call, when we refer to the 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 and welcome. Thank you all for being here with us today. Joining me on this conference call is Bob Eulau, our Executive Vice President and CFO.

Hi, everyone.

For today's agenda, we have that Bob Eulau will review our financial results for the fourth quarter of fiscal year 2011. Then I will follow with additional comments relative to Sanmina-SCI's results and future goals. Then Bob and I will open for questions and answers. And now I would like to turn it over to Bob. Bob?

Thanks, Jure. Please turn to slide 3. Overall, the fourth quarter results were better than we had expected. Revenue of $1.7 billion was up 1.3% on a sequential basis, and up 0.6% over the fourth quarter last year. This was at the high end of our guidance of $1.65 billion to $1.7 billion. Our gross margin came in at 7.8% which is down 20 basis points from the third quarter. Operating margin improved by 20 basis points from last quarter to 4.1%. Non-GAAP EPS was $0.47 per share. This was based on 82.7 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 $79 million. I'll discuss cash in more detail in a few minutes.

Please turn to slide 4. Revenue was up 1.3% or $23 million from Q3 to $1.7 billion. From a GAAP perspective, we reported net income of approximately $18 million which results in earnings per share of $0.22. This was up relative to last quarter, primarily because of the debt extinguishment costs which were incurred last quarter. For the year, revenue was $6.6 billion, up about 4.5% from $6.3 billion last year. EPS for the year was $0.83, versus $1.48 last year. The major differences on an annual basis were the favorable litigation settlement in FY '10 and the debt extinguishment costs in FY '11 that I just mentioned.

Restructuring costs totaled $14 million for Q4. Restructuring was higher than normal for a few reasons. First, we incurred about $4 million in catch-up depreciation for real estate that we are planning to sell. It is a technical accounting issue, but since we did not sell the assets within a year, we are required to recategorize these assets as normal operating assets and continue to depreciate them. We have no intention of using these properties and we will continue to look for an appropriate opportunity to sell these assets. The second discrete item during the quarter was further restructuring in Canada related to the Breckenridge optical acquisition we completed last year. At this point, we've moved all high volume optical production from Canada to one of our factories in Mexico. This was $4.4 million of restructuring during the quarter. The remaining $5.6 million in restructuring charges include $4 million for the typical restructuring that we've been recognizing as expenses as incurred, and $1.6 million related to litigation matters. Looking forward, we will continue to see some ongoing restructuring charges on our GAAP P&L of approximately $4 million to $5 million per quarter that primarily relate to the real estate which is being held for sale. This real estate is listed on the market at over $100 million, and over the last 2 years we've successfully sold over $50 million in real estate.

My remaining comments will focus on the non-GAAP financials for the fourth quarter. At $133 million, gross profit was down very slightly from the prior quarter. Gross margin came in at 7.8% which was 20 basis points below the previous quarter. Gross margin was in the range we had anticipated for the quarter. Component gross margin was above the corporate average and the highest level it has been in several years. Operating expenses were down $6.3 million for the quarter at $62.2 million. The biggest decrease in spending was related to a lower accrual for incentive compensation than in the prior quarter. At $70.4 million, operating income increased by 8% from the prior quarter. Operating margin was 4.1% which was a 20 basis point improvement over the previous quarter. The tax rate for the quarter came in at 15.4% of pre-tax income, which is also in line with what we had expected. On a non-GAAP basis, we earned $38.7 million in net income, or $0.47 per share. Net income was up 10%, and earnings per share were up about 11% from Q3.

On slide 5, we're showing you some of our key non-GAAP P&L metrics. As you can see, Q4 was good following the strong rebound we saw in Q3. Compared to Q4 last year, revenue was up 0.6%. We also saw solid gross profit in Q4, following the record gross margin in Q3. 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 8% to $70 million from last year. This led to operating margin of 4.1%. EBITDA also improved from last quarter at $94.5 million which was 5.6% of revenue. For modeling purposes, I want to mention that depreciation and amortization were $25 million for the quarter.

Please turn to slide 6. On an annual basis, all of the key financial measures improved. Revenue was up 4.5% while gross profit was up 4.1%. Operating income was up 8.4% for FY '11 after the dramatic improvement in FY '10. Finally, we made more progress in EBITDA which was up 9.3% from last year, and finished at 5.4% of revenue.

Now I'd like to turn your attention to the balance sheet on slide 7. Our cash and cash equivalents were $640 million. Cash was up $57 million from the previous quarter. Lower accounts receivable and higher accounts payable contributed to the increase in cash. Accounts receivable decreased by $28 million, while accounts payable increased by $26 million. Inventory increased by $6 million which I'll discuss more in a moment. The increase in property, plant, and equipment is due to the adjustment I previously discussed for the real estate that we continue to hold for sale, but have reclassified as held for use.

Let's turn to slide 8. Our cash position remains strong given our potential cash needs. Cash was up $47 million from Q4 of FY '10 which was achieved while using around $100 million to refinance and repurchase outstanding debt. As I mentioned earlier, cash was also up about $57 million from last year -- from last quarter, excuse me. Cash flow from operations for the quarter was $79 million, and capital expenditures for the quarter were $24 million. This led to $55 million in free cash flow.

Inventory remains a key focus. Inventory increased from $886 million last quarter to $891 million this quarter, while the inventory turns declined slightly from 7.2 to 7. In the lower left quadrant, we are showing cash cycle days which combine our cycle time for inventory, accounts receivable, and accounts payable. Inventory days were up 1.3 days when compared to last quarter at 50.5. We saw an increase in accounts receivable days sales outstanding from 54 days to 54.5 days as a result of customer mix. Accounts payable was favorable as days payable outstanding increased from 53.7 days to 56.7 days. This was primarily a result of higher inventory purchases. Overall, cash cycle time decreased from 50.8 days last quarter to 49.7 days. Finally, return on invested capital recovered nicely to 17.2% for the quarter.

Please turn to slide 9. I would now like to share with you our guidance for the first fiscal quarter of FY '12. Our view is that revenue will be in the range of $1.5 billion to $1.6 billion. Jure will discuss this in more detail, but we are seeing lower demand from several customers. We expect that gross margin will be in the range of 7.2% to 7.6%. Operating expense should be around $63 million. This leads to an operating margin in the range of 3.2% to 3.6%. Assuming no large foreign exchange surprises, we expect that other income and expense to be in the range of $21 million to $23 million. We expect the tax rate to remain in the range of 15% to 17%, and we expect our fully diluted share count to be around 83 million shares, plus or minus 0.5 million shares. When you consider all this guidance, we believe that you will end up with earnings per share in the range of $0.26 to $0.34. Finally, for your cash flow modeling, we expect that capital expense will be around $20 million, while depreciation and amortization will be around $25 million.

Overall, we're very pleased with the good profitability and excellent cash generation that we achieved in the fourth quarter. Looking forward to FY '12, it will be a challenging start with the revenue that we are forecasting. We are planning for the worst from an economic standpoint, and we hope that we are being too cautious. The management team has already been taking action to reduce our cost structure, but what we can achieve in one quarter is limited. We will focus on improving our performance in Q1, while positioning ourselves for success in FY '12. At this point, I'll turn the discussion back over to Jure for more comments on our target markets and our business strategy.

Thanks, Bob. Ladies and gentlemen, despite a lot of headwinds in our global economy, Sanmina-SCI delivered a strong fourth quarter. Our fiscal year 2011 is the second year of good results and continuous improvements. So we are pleased with accomplishments that we made in the fiscal year 2011, especially the future new opportunities that we created as we go on. Sanmina-SCI's in a great position. Our new strategy is working. I believe we're well aligned with our key customers. These are the leaders in their markets where we have a strong leadership position with each of them and continue to be more involved in their future growth. So in summary, just to add to what Bob said, fiscal year 2011 EPS -- non-GAAP EPS was $1.64, it grew 26%. EBITDA grew 9.3%. And this is mainly driven by our focused strategy where we are focusing on quality of the customer, quality of the revenue, better margin businesses, and focusing on the businesses that will return to us a fair, sustainable returns on our investments. So we have a nice continuous -- that's why we have a nice, continuous improvements in last 2 years. Our EBITDA grew 98% in last two years. We'll continue to lower our debt and improve the balance sheet. So things are definitely moving in the right direction.

Now, please turn to slide 10. I'd like to talk to you about our end markets. As you look at this slide 10, you can see right away that revenue for the year grew 4.5%. We forecast the fourth quarter to be basically flat. It grew approximately 1.3% on a quarterly basis. We also in the quarter had 10 top customers at 53% of revenue, and we also for a year, we had one customer over 10%. Name of that customer is Nokia Siemens.

Now, let me talk to you a little bit more in details about each market segments that we are involved in. Communication networks, which includes networking, wireline, and wireless infrastructure. For fourth quarter, we forecasted slightly up. That's the strongest market that we have and 47% of our revenue represents that in the fourth quarter. That market was down in the fourth quarter about 1.5%, basically driven by slower demand. We had some push-outs, and I also believe there's some inventory corrections going on with some customers. If you look at the year, communication networks grew a lot. It grew 26.2%. It was a great year for that market segment for us. As we look at the first quarter of 2012, as Bob mentioned, it's hard to forecast, but in the short term we've seen some push-outs, some inventory corrections, but the long-term fundamentals of this market segment and the key customers that we are involved with we believe are very strong, and this market should continue to be strong for us in the calendar year 2012.

Next segment for us is enterprise, computing, and storage which is basically high-end enterprise servers and storage. We forecasted that to be slightly up. Actually, revenue was 14% in the quarter, and it was up 2.8%. So overall, it was a stable demand, driven mainly by existing and the new projects that we are involved. For the year, that market for us was down approximately 14.9%. Basically, with a couple old programs that we're exiting, it was end of the life. As we look at in calendar 2012, especially first quarter, at this time we're forecasting flat. We see stable demand in the short-term, again, driven by some inventory corrections. But as we look farther than that, we continue to win some new programs in this segment and we expect to grow existing annual customers.

As I move along to our industrial defense and medical segment, we forecasted that segment to be flat, slightly down. Actually, it came about 0.5% down, represented at 24% of our revenue. Medical was up, industrial was down, mainly driven by semiconductor equipment. Defense was up in the quarter itself. As we look at 2011 as a whole year, this segment was basically flat, down 0.3%, mainly down because of defense and aerospace, we had a weakness there all year long. Medical industrial performed pretty well. As we look at the forecast for our first quarter of 2012, again, we're forecasting flat for this segment, slightly down. We continue to see weakness in semiconductor capital equipment, defense, and aerospace. For medical industrial we expect to see continued stable growth, but for long-term, again, all these segments we expect to be moving in the right direction. I think we're well positioned here.

Multimedia represented 16% of our revenue. We did forecast that to be slightly up for the fourth quarter. Actually, that came in pretty strong. It was up 12.6%. Mainly our existing customer demand was pretty strong. For our whole fiscal year 2011, that market was down about 17.7%. We did exit some unprofitable customers there, and we had 1 or 2 customers that their demand for existing products was not very strong. As we look at the forecast for the first quarter 2012, we're forecasting flat, slightly down. We expect to continue to see a stable demand here. I think the customer base is pretty strong. So the longer term, as long as the economy cooperates, we expect a nice upside.

So now let me talk to you more about our current business environment, especially what we see in the first quarter, our December quarter of fiscal year 2012. Current business environment continues to be, the way I call it, uncertain in the short-term. 3 months ago, when we talked to you, we really at that time our forecast for first quarter fiscal year 2012 looked a lot stronger. But especially in the last few weeks, we've seen a lot more push-outs in demand. We've also seen some inventory correction across many of our markets. Also, we are concerned about the potential supply chain constraints that we might have -- could have related to the Thailand floods. We do have a factory in Thailand ourselves which represents about 3% to 4% of our revenue. Good news is that our factory is not flooded and operations continue to operate. So for a year, we are cautious, as Bob mentioned, but at the same time we are confident that we'll continue to deliver improvements in fiscal year 2012.

Now let me talk to you about longer term environment in our key focus markets. Longer term when you look at forecasts and so on, that looks good. I believe that we are well positioned in these markets. We have strong customer base. But I think our customers are very cautious in the near-term, but I can tell you they're still bullish about the long-term potential. We do have strong and diversified customer base in each of these key markets. And the positive side, if you look at the forecast of our key customers, they are forecasting growth in calendar year 2012. So again, fiscal year 2011, I think we were very successful winning new programs with existing customers, and also we continued to expand our customer base in some critical programs that we're going to be working on for many months, in some cases years. These opportunities will have a positive impact for our fiscal year 2012 and beyond.

Now I'd like to ask you to turn to slide 11. I'd like to talk to you about -- just a little about our strategy and also products and services. In 2011 we made some changes really focusing how we're going to differentiate ourselves when it comes to our technology, products, and services from our competition. So we really focused really on the groups that could drive our growth and our margin. As you look at this slide here, we went from one large organization that we basically controlled all these businesses to what we call today more focused business groups. Of course, our EMS in the middle, it's still core, but it's supported with other components, products, and services. We expanded management and focused on these component products and services to be more independent, so they can focus on the individual go-to-market strategies so they can provide better technology to the very competitive world. Also, we made them leaner. I think they're a lot more competitive today. And also, I believe with this structure today, we're servicing our customers a lot better. We definitely believe this structure will continue to drive the growth and the margin expansion in each of these businesses. So when I look at the way we're structured today is that each of these groups has a strong global structure in place. So we do expect this model to produce a superior execution, continuous improvements, and industry leadership in each of these business groups, all the way from our printer circuit boards to mechanical to optical, defense and aerospace, where we're really focused on mission critical products, Newisys which is a storage joint development and ODM products on a really high end. Viking Technology which is memory modules and solid state solution. Then Sanmina Global Services, again, supportive with our design services around the world. So I think this is the best structure that we have today. I believe it's a structure that will allow us to compete globally.

So in summary, overall this was a good quarter, especially in this environment. Again, we have lots of leverage in our business model in any economical environment. As Bob said, we are adjusting to this environment today, and we are operating in an environment that is also very difficult to predict. On the good side, demand for our products and services is expected to grow in 2012. I believe we're positioned today better than we've ever been positioned in the last 10 years. But at the same time, we have to be cautiously optimistic that 2012 is going to continue to deliver better results. So in this economy, we're going to continue to monitor this macro environment and we're going to adjust accordingly.

So in summary, now I would like to say thank you for your support and taking your time with us today. But before I go to the operator, I would also like to remind all our investors and analysts that Sanmina-SCI with its management will have Analyst Day on November 17 in Boston. So all of you are invited. I'm hoping to see as many as possible. And we're looking to really share our strategy and give you a lot more details, not what we did yesterday, but most importantly where we're going from here, a lot of exciting things. So looking forward to seeing you there. Lot of the information is already in our press release, but if you need more information please call us. And again, looking forward to seeing you there. Operator, we're now ready to open these lines for question and answers. Thanks again.

(Operator Instructions).

Sean Hannan, Needham & Company.

Good afternoon.

Hello, Shawn.

Hi, Shawn.

Quick question around your guidance. Jure, I wasn't sure if I had heard specifically what you're looking for the next quarter, but I think from your broader guidance seems to imply that communications will probably be down double digits next quarter. And just looking to see if we can get a little bit more color behind whether within networking, wireline, wireless infrastructure, where exactly we're seeing either the inventory corrections, the push-outs, and any more information would be appreciated?

First of all, we believe, as I specifically talked about, communication networks that the short-term, definitely there's some push-outs and some inventory correction. I don't think I can talk too specific about one market segment in the group, but I can tell you it's really more across multiple customers, across the whole industry right now. And on the positive side, Sean, we're not seeing cancellation. What we're really seeing there is more push-outs. So we think that's just a temporary adjustment, and we still believe that our communication network infrastructure business will grow in 2012.

Okay, and to clarify, we're expecting growth in the aggregate for fiscal '12? We still are optimistic around that based off of this December guidance? That would imply a pretty significant growth in the back half of the year.

Let me tell you why we are confident. We have a -- we are involved in a lot of new programs, most of our revenue in that's coming from the new programs that we won in last 12 months or 18 months. So these are all new programs. We're well positioned with all the key players, and there's a lot of other opportunities that we're working on. This is the area that I believe that we can win as long as these customers grow. If you'll watch -- if you listen to them and watch their forecasts, they are expecting to grow in the calendar year 2012.

And then last question. Now that you've completed fiscal '11, when you look at those wins that you just referenced, Jure, through the year, versus, say, fiscal '12 and realizing you don't specify a dollar number, first, can you share with us whether you actually won a higher level of business? It sounds like perhaps you had. And then second, can you provide color on the segments that perhaps may drive that mix of wins to contribute more meaningfully in fiscal '12.

Well first of all, definitely our largest segment, the communication infrastructure will continue to grow for us. As I mentioned in my prepared statements, enterprise computing, we've got a lot of activities going on, including our own ODM products that has a lot of potential. I think our defense, aerospace, industrial, medical segments will continue to be stable. Defense was a tough business for us in 2011. We don't expect defense business to recover fast in 2012, but we believe the other businesses will help the growth in that segment. I think multimedia for us, that group of customers is also pretty solid. So overall I think it will be more across all our customers that unless this whole economy goes down, but we're a lot better positioned today. We won more new programs in 2011 than in 2010. So I think the future is brighter. The question is, is just when this demand is going to be there.

Okay. Thank you very much. I'll jump back in the queue.

Thanks, Sean.

Jim Suva, Citi.

Thank you. Jure, it's Jim Suva. How are you?

Great, Jim, how are you?

Great. Quick question. Maybe you can help me cross the gap here a little bit about your guidance on the gross margin, compared to, say, a year ago in the same quarter, it looks like year-over-year gross margins are going down? And can you help us figure out why is that the case, as we kind of hope for gross margins post restructuring to be going higher?

Well, let me give you a couple points and I'll turn it over to my -- to Bob, our CFO. First of all, it's mainly driven by the revenue today. We do expect as the revenue comes up to our margins continue to improve, I think our model drives that. Even the quarter that we just finished, the business was challenging, especially at the component level. We delivered at a higher margin, our component level, than overall Company but still demand for component level is down. We do expect that component level demand to come back hopefully in the second quarter, so that will help us out. But it's really more revenue driven. Bob?

Yes, I think Jure hit the highlights. Our margin's going to be very dependent on revenue and on mix. And as you know, the components business is very high contribution margin, and so when revenue goes the wrong direction it has a disproportionate impact on margin. So while we've enjoyed 3 quarters in a row of components being higher than the Company average gross margin, we're planning for the December quarter that component gross margins are actually going to decline. So that's probably the biggest issue in addition to just the pure fact Jure mentioned of revenue declining overall puts a lot of pressure across the board.

Great. And then my follow-up is, Jure, on your prepared comments you mentioned the last few weeks you saw some more volatility or lack of visibility or order cancellations. Can you maybe help us isolate or figure out which end markets you saw the biggest change that was a little bit unnerving?

Well, first of all, when I saw a few weeks, it's really last three weeks we've been seeing more push-outs than what we expected. Of course, with our communication infrastructure being almost 50% of our revenue percentage-wise, that was more push-out there than other markets. But we do also some push-outs especially in the semiconductor side of the business. As I mentioned in my prepared statement, our defense and aerospace business is not growing at this time, but we are investing a lot of money in that side of the business. That's why, if you look at my model, what we're doing, we actually separated that business to make it independent as possible so that they can focus on new opportunities. And that's becoming more a product company than just an EMS company. So overall, I would say the biggest impact we've seen in communication infrastructure, but we're seeing across other markets also.

I want to make sure that we're clear that the problems aren't just in communications, and while we wish it weren't the case, we're seeing declining revenue from September to December in 9 out of our top 10 customers. So it's pretty diverse. It's not any one area. Communications gets a lot of attention because it's almost half the business, but the softness is pretty much across the board.

Great. Thank you for your details. It's always very useful, gentlemen. Thank you.

Thanks, Jim.

Wamsi Mohan, Bank of America.

Hi, good afternoon.

Hi, Wamsi.

Hi, Jure. Can you help separate the impact of the component constraints from the Thailand flooding from the weaker demand environment and the push-outs you noted? And what components are you most worried about?

Well, definitely there's a couple key components. It's some of the stuff that we have in our optical business, we're worried about that, and also some of the disc drive business that we have. And there's some other few, semiconductor, components. We're working around it, but right now we know there's going to be an impact. It's really hard to figure out exactly what impact because both us and the customers are working very close to find a way to minimize the impact. And it's mainly from other suppliers. As I mentioned, our factory's fine. Some minor interruption, just for employees coming to work. But we got 85 -- I think I got a report this morning, 85% of our employees are there. And so from that point of view, I would say it's our optical business and disc drive business.

And any way to size that, Jure, for next quarter, like is it $25 million, $50million implied within your guidance that you're thinking would be the hit from this?

To me, it's really difficult because there's still a lot of moving parts. In some of these cases, both customer and us are not giving up on the revenue yet because they have an end customer requirement. So that's why we don't like to put a number on it. We still have 2 months to go and we're trying to find a way to satisfy all the customer needs.

Okay. Thanks, Jure.

I'd just add, I think our team has done a great job. In some cases we've shifted volumes to other factories in Asia. And we've done a very good job of meeting demand thus far. And so we just have to just keep working through the issues day by day.

Thanks, Bob. And can you perhaps provide some more details on the comments that you made at the end of your prepared remarks around the cost structure? Seemed like you're taking some steps to better preserve the margin structure going forward, but can you be a little more specific about what those actions are and what the magnitude of cost savings we can expect from them?

I can't be real specific, but I can tell you that we've, as a team, already been looking hard at every part of the business. We're fortunate, we have a flexible workforce in many cases. So as we have lower demand we can react fairly quickly to that, and we're going to take some time off around the holidays, do the classic things you do when demand starts to decline a bit. But in terms of specifics, I really can't offer much more than that. And as I said also in my remarks, there's only so much you can do in a short time horizon. So we're doing all the things we can do very quickly, and then we do believe that the business will be coming back later in the year. So we want to make sure we don't do anything in the short-term that jeopardizes the long-term as well.

And if I could add to that, Wamsi, I think in this environment, I think if you look at our potential and the customer base that we have, it's very strong. It's one that demands. How far do you cut, I think that's the biggest question. In the meantime, we're really more focused on working with our customers close, understanding their real demands so that we can adjust to it. And as we said in our prepared statement, I think good thing about this business is that we know how to adjust to it and we can adjust quickly.

Okay. Thanks a lot, guys.

Thank you.

Craig Hettenbach, Goldman Sachs.

Just a follow-up on the end market commentary. I know you said it was -- you're seeing a broad base decline. Any additional insight into inventory because in looking at the guidance for the communications business, down double digits versus the other markets, flat to slightly down? In looking back, is that the bigger issue that those markets in comm got built up more and now they have to be worked down? Can you shed any more light on that?

Craig, Jure here. I don't know if I can give that much details, but definitely you have a couple scenarios. On the positive side, let me start on the positive side. None of these things seem like cancellation. Most of these things getting pushed out, and it's more -- some cases driven more by end customer and some cases it's driven by inventory correction. So I think it's more customer-driven than a whole industry. But we believe that's a short-lived, and because if you look at deeper, the pipelines are not over filled.

Okay. If I can follow up then, just as you look out to fiscal 2012, independent of the macro environment, can you highlight any areas where you feel the best in terms of new program activity, where you could drive some growth by end market?

I already mentioned that I think communication infrastructure is definitely one for us because that's almost 50% of our revenue. We're well positioned with all the leaders in that industry. So we expect to grow there. And I think we're going to see some nice improvements in enterprise computing, and then in medical industrial defense is only one that we are not forecasting growth. We're forecasting some growth from 2011, but there's nothing to be excited. So I think it's more across most of our customers.

Okay. Just last one on that last comment on defense, not expecting much growth there. Any update just from the customer interaction in that market, and just programs have been on hold, if you have any other new update on visibility there, when you could expect some programs to be released?

Well, that one is really hard to forecast, but let me put it this way. When it comes to defense and aerospace, most of the business that we ship in that market is Sanmina's product. These are the products that we ship directly to the end user. Demand for that product because of the military situation, what goes around the world, is down. But at the same time, we are investing, we continue to invest in that side of the business, actually when it comes to R&D we're not slowing down. We continue to invest. We continue to invest in the business development side because we believe we have a lot of opportunity on that side of the business, especially developing and selling Sanmina type of product directly to let's say Marines or Army and so on. And the key to that and why that's important to us, because margin on those type of products a lot higher than typical EMS.

I think it's good news after a couple quarters of pretty significant decline. We actually saw defense up slightly this last quarter and we think it has stabilized for FY '12. So I think -- I hope that the worst t is behind us and I think it probably is.

Okay. Thanks for that, Bob.

Thanks, Craig.

Sherri Scribner, Deutsche Bank.

Hi. This is actually Kevin [Labud] in on behalf of Sherri. I may have missed this, but did you say that you saw sequential improvement this quarter in your components business? And then also just looking forward are you able to improve -- are you able to improve margins there, barring growth in volume or is volume really what's dictating margin improvements there? Thank you.

What I said was actually for the second quarter in a row is a record profitability for us on the components side and above the corporate average. We do not expect that to be the case in December. It's a very high contribution margin business, and when revenue declines it has a bigger impact on that business because of that high contribution margin. So it was a good quarter from a components standpoint, but we're definitely facing some headwinds there in December.

Excellent, thank you. Just as a second question, changing gears a bit, looking at the optical space, one of your top competitors there has much of their manufacturing footprint in Thailand and their factories are shut. So I was just wondering if you started any discussion with customers or if you've seen any uptick in business on your optical from that?

Kevin, in this environment, when there's a natural disaster like that, what we're trying to do is to help out and we are involved with multiple customers, trying to help them out during these tough times. So those are services that we offer. A lot of times these are the same customers that we have, and we'll continue to work and see how can we help them out so they can satisfy their customer requirements.

Excellent, thank you.

Lou Misciosicia, Collins Stewart.

Thanks, Jure. If I could ask about the computing sector, obviously you mentioned in your remarks that, that was down and one program went end of life. Maybe you could give more color about that? And it does sound like you're going to be replacing that business pretty soon?

Actually for the quarter, that business was up 2.8%, Lou. For the year, that was off 14% plus. We talked about this in our previous quarterly calls, that we have some programs that were end of the life and that's kind of coming to the end, and a lot of the new programs are picking up. And I think that's one of the reasons we see some growth in the last quarter. We're forecasting a stable -- flat, stable growth. Good thing is that we are involved in a multiple customers out there that could be a substantial amount of business, especially in some of the high-end enterprise storage product that we provide. And also, we were able to widen the customer base in the last 6 months.

Okay, great. And then on slide 11, your fiscal '12 strategy for your key business groups, could you maybe go into a little more detail, and I'm sure you'll do it at the analyst meeting, about what the changes are? I know that one of the big things you always had tried was cross selling. Did you ever able to increase the percent of that? And the changes that you have, how is it going to affect each area or the whole business?

What we created here in 2011, Lou, is to create these businesses to be -- first of all, to differentiate ourselves from our competition because we have a lot of technology that we offer, and to be able to build on that, when everything was run with -- let me put it in very simple English -- in one bucket, it was sometimes these unique businesses got a little bit lost. So we pulled them out so they can now -- they have their own leadership, they can focus. At the same time, help our core EMS whenever is needed. So for example, if you take our printer circuit boards and backplanes, it's an independent business. They've got to develop the technology. They've got to compete in the circuit board companies out there, not the EMS companies. Same thing when it comes to mechanical which is enclosure, precision machining, large system capital equipment. Their competition is different than just our core EMS. Optical, for example, we've grown this optical business in the last couple years to become now one of the top -- one of the 2 top players in the world when it comes to optical assembly, optical design capabilities, and so on. So we want to grow those businesses.

Defense and aerospace, I just talked about earlier, was always part of the big EMS organization. We separate that because here we are focused on really developing the product. We've got large engineering team that is working with the government, research and development. We brought the president of the this division, we're bringing in VP of sales and marketing, so we can really identify and go after the right programs here. And I talked about Newisys. We talked about our memory module, it's a perfect example. We've got a custom memory module with solid state driver, we call Viking Technology. It's been very successful to compete. So really we're trying to identify each of these businesses so they can compete better. It's all about technology, time to market, cost, and being a leader in technology. I think this model allows us to do that and we'll talk more about it at our analyst meeting.

Okay. Thanks, guys.

Thanks, Lou.

Christian Schwab, Craig-Hallum Group.

Most of my questions have been answered. 2 quick little things. Number 1, can you just give us a rough idea, Jure, of the general mix in your defense, industrial, medical? I know you said before that medical is slightly greater. But can you just give us a rough idea of where you're sitting today?

Well, as you know, that group is about 24% of our total revenue. Beginning of the year, we expected that group to be higher and because we did not forecast our defense business to go down as fast as it did in last 6 months, or really almost 9 months. If you look at that group, I don't have a statistic in front of me, but medical is a big part of that and then industrial medical. It's almost like third, third, and third type of a thing. But that group is very stable group, and I believe as the defense comes back, that group is going to be the most profitable group of all the groups that we have.

What is more important in that group to the profitability and revenue growth? Is it a recovery in the defense and aerospace? Or is it more important that the semi cap equipment business recover back to maybe levels that you saw 2 quarters ago?

Well, for us, we would rather get more defense and aerospace business because I believe that's the product that we are the most profitable with, but we're not giving up on semiconductor. We believe that semiconductor based on our analysis will recover sometime in 2012. I believe we are well positioned with those customers. And I think what I don't want people to forget, we delivered, in a tough environment, good year. I believe we are positioned, unless this whole economy falls off the cliff, we are a lot better positioned for the future in 2012 than maybe what we accomplished in 2011. And each of these businesses we talked about has the potential to expand and grow because how well we are positioned with the customer. We want and we invested a lot of time into the business development. We continue to invest in business development and technology and product design. And with the new model that we've been working on the last 12 months that I've been talking on the slide, 11, that new model really allows us to be more competitive and more cost effective. So even in a tougher economy, we're hoping that we'll find a few cents here and there.

Great. As we kind of figure out how to get a few cents, remind me how much exactly of real estate do you have for sale?

It's over $100 million is still available for sale, and we've sold about $50 million -- over $50 million worth in the last 2 years.

Okay, perfect. And then my last question just has to do with the cash balance. You've done, just to your point, Jure, we're facing a pretty challenging market and you're still going to make at the midpoint $0.30 this quarter, something a couple years ago nobody thought you'd ever make in a quarter. But now we're sitting with a pretty big cash balance, I believe you've said in the past, a level that's substantially higher than what you actually need to run that business. So what is your idea on cash in the near-term? Are you still planning on repurchasing debt from time to time if it's advantageous or do you want to stockpile given the uncertainty in the marketplace? What is your general idea of your cash balance today? Thank you.

Christian, it's Bob. I'll take that one. We're very comfortable with the cash levels we have today. We're really pleased with the cash that we generated this past quarter. We believe in FY '12 that we'll generate, if it's a slow growth environment, we believe we'll generate cash during the course of the year. In the December quarter, it's a little unclear exactly how cash will come out. The calendar doesn't help us a lot there with the holidays and so forth. So we'll be cautious here in the next few months. But our longer term strategy is exactly the same which is to continue to repurchase debt and to delever the Company, and I'm very confident we'll be able to do that and I think in a slow growth environment we'll actually generate more cash, not less.

Great, thank you guys.

Thanks, Christian. Operator, we have time for one more question.

Shawn Harrison, Longbow Research.

Hi, good evening. I'll try to make it brief. Bob, just on the comment of cash generation in the December quarter, what do you expect inventory dollars to do? Would you expect it to decline sequentially?

We're certainly going to try and make that happen. We're a bit disappointed in the inventory turns this past quarter. As I mentioned, they dropped down to 7 from 7.2. Our longer term goal is to get them up to at least 8. And one turn of inventory is about $100 million in cash, so there's a big opportunity there. We're working with the accounts right now to really make sure we understand demand and that we manage our own inventories as effectively as we can.

So it sounds like the shortfall this quarter was more order volatility than anything else?

From an inventory standpoint you mean?

Yes.

Yes, certainly we had expected to do a little bit better, and now we'll be burning off that inventory.

Okay. And then the follow-up question, just in the components business, given the weaker demand environment are you seeing any abnormal pricing dynamics within any of the components businesses, or is it pretty normal versus what you've been seeing over the past 180 days?

I think the pricing environment's been pretty stable. We're not seeing much of a change there. What we are seeing as I mentioned earlier is that business, when you end up with an economic headwind like this, the components business is the first to face pressure. And that's what we're seeing right now is more pressure on the components side. We also believe that business will be the one that recovers the first, as business picks up again. We haven't seen much change in terms of the pricing environment, but we definitely are facing some demand pressures there.

All right. Thanks so much.

Thanks.

First of all, I want to thank you to everybody on this call. Also again, I want to again remind all you that we're going to have that Investor Analyst Day November 17. We are looking forward to seeing you there. We really like to hopefully see you all there so we can go into details and talk a little bit more about the strategy. There's a lot of exciting things here and we want to share it with you. Thank you very much.

Thanks, everyone. Look forward to seeing you in a couple weeks.

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