Sanmina Corp (SANM) 2012 Q1 法說會逐字稿

Good evening, my name is Cortless and I will be your conference operator today. At this time, I would like to welcome everyone to the Sanmina-SCI first quarter fiscal 2012 earnings call. (Operator Instructions) After the speaker's remarks, there will be a question-and-answer session. (Operator Instructions) Thank you. Ms. Bombino, Director of Investor Relations, you may begin your conference.

Thank you Cortless. Good afternoon, ladies and gentlemen, and welcome to Sanmina-SCI's first quarter fiscal 2012 earnings call. A copy of today's release is available on our website, in the Investor Relation section. You can follow along with our prepared remarks, in the slides posted on our website. Please turn to the Safe Harbor statement.

During this conference call we make projections or other forward-looking statements regarding 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 annual report filed with the Securities and Exchange Commission.

These documents contain and identify important factors that could cause the actual results to differ materially from our projections or forward looking statements. You'll note in our press release in slides issued today that we have provided you with the statements of operation for the three months ended December 31, 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 in 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 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 our 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, and good afternoon ladies and gentlemen. Welcome. Thank you for all of you being here today with us. On today's call, I have our CFO who's joined us, Bob Eulau.

Hi, everyone.

The agenda today we have is that Bob will review our financial results for the first quarter of fiscal year 2012, then I will follow-up with additional comments relative to Sanmina-SCI's results and future goals. Then Bob and I will open for question and answers. And now, I would like to turn this over to Bob. Bob?

Thanks Jure. It is a pleasure for me to be joining you on today's call. Please turn to slide 3. Overall, the first quarter was challenging, but not significantly different from what we had expected. Revenue of $1.5 billion was down 11% on a sequential basis, and down 10% from the first quarter last year. This was at the low end of our guidance of $1.5 billion to $1.6 billion.

In some cases, like the communications network segment, we suffered from weak demand, and in other cases, we had reasonable demand, but we suffered from supply issues due to the floods in Thailand. Our gross margin came in at 7.3%, which was down 50 basis points from the fourth quarter. Operating margin declined 80 basis points from last quarter to 3.3%. Non-GAAP EPS was $0.28. This was based on 82.7 million shares outstanding on a fully diluted basis. Finally, cash generation was a challenge this quarter, with cash flow from operations at negative $13 million. I'll discuss cash in more detail in a few minutes.

Please turn to slide 4. Revenue was down 11% or $195 million from Q4 to $1.5 billion. From a GAAP perspective we reported net income of approximately $9 million which results in earnings per share of $0.10. This was down relative to last quarter by $0.12. Restructuring costs totaled about $4 million for Q1. The costs primarily reflect what we have been recognizing as expenses are incurred related to real estate. 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 real estate, which is being held for sale. This real estate is listed on the market at over $100 million. Over the last two years, we have sold over $50 million in real estate. My remaining comments will focus on the non-GAAP financials for the first quarter.

At $110 million, gross profit was down $23 million from the prior quarter. Gross margin came in at 7.3%, which was 50 basis points below the previous quarter. Gross margin was at the low end of the range we had anticipated for the quarter. Operating expenses were down $2.1 million for the quarter, at $60.1 million. This was due to the cost controls that we put in place during the quarter, including time off that most employees took during the holidays at the end of December.

At $49.9 million, operating income decreased by 29% from the prior quarter. Operating margin was 3.3%, which was an 80 basis point sequential decline. The tax rate for the quarter was favorable, at 15% of pre-tax income, which was at the low end of the range we had expected. On a non-GAAP basis, we earned $22.8 million in net income, or $0.28 per share. Both net income and earnings per share were down 41% from Q4.

On slide 5, we are showing you some of our key non-GAAP P&L metrics. Let's start with revenue, which was the key driver of our financial results this quarter. We were impacted by at least four factors. First, we had general softness in demand across all segments. As you'll see in a few minutes, every segment was down on a sequential basis. Second, as we expected, we saw significant softness in the communications area. Third, we saw a larger decline in the components area, and fourth, while our factory in Thailand was not directly affected by the floods, supply constraints due to the floods constrained our shipments by $30 million to $40 million.

All of this was a disappointment after strong revenue in Q3 and Q4 last year. Compared to Q1 last year, revenue was down 10%. We also saw a decline in gross profit in Q1 following solid performance in Q3 and Q4. Our gross margin came in at 7.3%, which is the lowest it has been in a number of quarters. The revenue decline and the mix of revenue were the primary drivers in the decline in gross profit and gross margin. We experienced revenue decline in most areas, but it was particularly pronounced in the component areas. With the high contribution margin in the component products, when we have declines in these product areas, it has a disproportionate impact on our gross margin. Our operating profit declined 29% to $49.9 million from last quarter. This led to operating margin of 3.3%. EBITDA also declined from last quarter to $74.4 million, which was 4.9% of revenue. For modeling purposes, I want to mention that depreciation amortization were $25 million for the quarter.

Now I would like to turn your attention to the balance sheet on slide 6. Our cash and cash equivalents were $604 million. Cash was down $36 million from the previous quarter. The decline in cash was largely a result of a drop in the revenue forecast within lead time for material purchases. Accounts receivable decreased by $83 million, while accounts payable decreased by $125 million. Inventory increased by $13 million, which I'll discuss more in a moment. Property, plant and equipment were unchanged for the quarter. We are very pleased with the ongoing strength of our cash position. We expect to generate cash in Q2 and have decided that now is the time to further reduce our outstanding debt. Our plan is to call $150 million of our long-term debt which is due in 2016. We expect the call date to be March 1, and we expect to save about $12 million in interest expense on an annual basis, as a result of this transaction. With the current outstanding share count, this will improve our EPS by about $0.14 over the next year.

Let's turn to slide 7. Cash was down $36 million from Q4 of FY '11. Cash flow from operations for the quarter was negative $13.3 million, and capital expenditures for the quarter were $24.3 million. This led to negative $37.6 million in free cash flow. As I mentioned, we expect to generate positive free cash flow in Q2. Inventory reduction and cash generation are a key priority this quarter for our team. Inventory increased from $891 million last quarter, to $904 million this quarter, while the inventory turns declined from 7 to 6.2. This deterioration was primarily a result of customers pushing out deliveries within the component lead times.

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 7 days when compared to last quarter at 51.8. We saw an increase in accounts receivable, day sales outstanding, from 54.5 days to 58.3 days, as a result of changes in payment terms, and the fact that we look at this measure on an average basis. Accounts payable was favorable as days payable outstanding increased from 56.7 days to 60.4 days. This was primarily a result of purchases declining faster than cost of sales and the fact that we look at this measure on an average basis. Overall, cash cycle time increased from 49.7 days last quarter to 56.7 days. Finally, ROIC was 12.1% for the quarter.

Please turn to slide 8. I would now like to share with you our guidance for the second quarter of FY '12. Our view is that revenue will be in the range of $1.45 billion to $1.55 billion. We expect that gross margin will be in the range of 7.1% to 7.5%. Operating expense should be $61 million to $62 million. This leads to an operating margin in the range of 3% to 3.4%. Assuming no large foreign exchange surprises, we expect that other income and expense will be in the range of $20 million to $22 million. We expect the tax rate to remain in the range of 14% to 16% and we expect our fully diluted share count to be around 83 million shares, plus or minus 500,000 shares. When you consider all this guidance, we believe that we will end up with earnings per share in the range of $0.24 to $0.30.

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. We expect that we will generate significant free cash flow this quarter as we have time to adjust our working capital levels. Overall, we are navigating through a challenging period with our business mix. We took action to reduce our cost structure last quarter and we will continue to focus on controlling costs. We have a big opportunity to generate cash, and to continue to reduce our outstanding debt. We'll focus on improving our performance in Q2, while positioning ourselves for better results in the second half of fiscal year '12. At this point back I'll turn the discussion back over to Jure for more comments on our target markets and our business strategy.

Thanks Bob. Again, ladies and gentlemen welcome, and I would like to add a few comments relative to what Bob said regarding our results. Let me talk to you about the business environment, give you some additional outside information on the December quarter, talk about short-term business environment and demand for the March quarter. I'll also talk a little bit about visibility for the rest of the calendar year 2012. Then I will summarize and give you a quick overview of our strategy.

As Bob mentioned, on November 1, in our fourth quarter conference call, we talked to you about in the short-term that we did expect the environment to be challenging, and unfortunately, that is basically what we saw during the first quarter. We did experience weak demand in communication networking segment, and the biggest impact came from a wireless access products. We also experienced continuing inventory correction from end customer in the industrial, medical and multi-media markets.

Defense and aerospace actually stabilized during the quarter and we expect that business to continue to be stable and long term to grow again. Addition to a weak market demand, we had a supply constraint as Bob mentioned caused by Thailand floods. Supply constraints reduced potential shipments. We had to, at the end of the day as Bob mentioned, we had a factory in Thailand that fortunately stayed dry, but we had to work a fair amount of overtime to make the shipments.

But at the same time, some of the parts that we couldn't do affected our revenue for the first quarter between $30 million and $40 million. The majority coming from enterprise computing market and multi-media markets. Again, for a second quarter, short-term business environment will continue to be challenging, as Bob mentioned. We do expect business demand to continue to be stable, though, at this level. Addition to this challenging environment, we all know that typically second quarter what we call March quarter, is normally seasonally down quarter. But after the second quarter, we do expect things to start normalizing and improving. Now please turn to slide 9. As you can see here, top 10 customers represented approximately 49.1% of our revenue, and we also had one customer around 10% of our revenue.

Let me now give you more information on each market segments. Communication network which consists of network in wireline, wireless infrastructure product. Beginning of the quarter we knew this market was going to be down, and in actuality came down 15.6%. This is a major market for us. Represent last quarter 45% of our revenue. With a lots of push outs. And again, most of these push outs came and were driven, as I mentioned earlier, 85% was driven by wireless access market. We have seen a lot of inventory correction by our end customers -- by our customer's customers. We are also, in this market, experience as I mentioned earlier, some shortage in optical components that were caused by the floods. But it wasn't a major amount.

As we look in the second quarter, we believe at this level, this business is stabilized, we are starting to see some upside. Again, we do have well and diversified customer base here. In addition to that, we still continue to see fair amount of new opportunities. We also have some new programs that we won quarters ago like LTE programs that we expected to be shipping sooner, but we are starting to see a little bit more positive news on that and we should see some more shipments in the future on our LT programs again. Also, we won some new optical wins that should help us in, as I look out, the next couple of quarters. Again, and if you just talk to our customers, what we are getting is that overall, the year-to-year, they still feel positive about it, and I'll make more comments later on, on that.

The next market segment that I'm going to talk about, is enterprise computing and storage and that was approximately 16% of our revenue. We did expect that market to be flat. But actually it was mainly driven by shortages of the disk drives and some inventory corrections that we saw with a few customers. As we look at the second quarter, what we are forecasting is stable, slightly up. We expect to continue to win new projects; I think we have some good projects that we are working on. Some fair amount of new opportunities, and again, we still expect this market to be up year-to-year as we look at the whole 2012.

The next market I want to make a comment on is industrial, defense and medical. That represented 25% of our revenue. Again, beginning of the quarter, we thought that business was going to be flat, slightly down, actually came in 5.7% down. We continue to see weakness in semiconductor capital equipment. As I mentioned earlier, defense and aerospace part of the business stabilized during the quarter. And medical was slightly down, mainly driven by inventory correction and some slower demand on a few programs that we have.

As we look at the second quarter, we are forecasting stable environment here, semiconductor will continue to be weak. We think we are going to continue to see weaknesses there for at least the next couple of quarters. Defense and aerospace will continue to be stable, maybe slightly improved. Long-term, we continue to invest fair amount in this market especially in the product development with the government. The research and development. And we believe that we have a fair amount of good new opportunities in the future. Medical business for us will continue to be stable. And again, if we look at this market in total, we expect this market to have a fair amount of new opportunities in 2012. Multimedia represented 15% of our revenue. We did forecast that market to be flat to down. They actually came 15% down. Number one was driven by the shortages of the disk drives in our set-top box business. That is improving but it was really, like I said, affected a lot in the last quarter. And also weaker demand across other markets that we have, including a slight decline in automotive.

As we look at the second quarter, we expect multimedia to continue to be down slightly. Continue to see some shortages of disk drive in the second quarter and yes, things are getting better. But, we are still having a problem getting enough to what we need today. Automotive, we are optimistic about that one for a year. We do have some new programs coming up, and we expect things in that market to really improve.

Now let me talk to you about visibility and outlook for June quarter and the rest of the rest of the calendar year 2012. The forecast from our customers for June quarter, at this time, I would say visibility is getting better. And our customers expect this demand to start improving. And again, most of these customers still have optimistic outlook for second half of the calendar year 2012. So as we look you know at the 2012 and despite lot of headwinds in a global economy, in this environment, you focus on things that is in your control. We are going to continue to reduce costs as Bob talked about, tune in about efficiencies across all our systems and operations, continue to build our strong relationship with our key customers, and continue to invest in the future. If we are focusing heavily in technology and innovation, research and development and in new products, and continue reviewing and investing in our business development, sales and marketing.

So again, you know as you look at the global economy, there is still a lot of uncertainty in this economy today. But I can tell you that Sanmina is ready for any economical environment. During our business transformation we had a lot of moving parts. The good thing all that is now behind us. Now we are in a great position and we can focus on growth as the economy improves. Company has a strong liquidity.

We expect to continue to generate strong positive cash flow in the next couple quarters, and we have a strong infrastructure in place to compete in each of our focused segments. And as Bob mentioned, we'll continue to reduce our debt. Again, we are well positioned for upside and a better future as the market demand improves. Even in this market, there is still fair amount of opportunities that we are working on, our book to bill for the first quarter was slightly positive, nothing to brag about, but it was positive. But we are expecting to continue in the second quarter that our book to bill to be positive again.

So please turn to slide 10. I just want to talk to you a little bit about our strategy and how we are positioned and how we are going to compete. I can tell you that we are building a strong foundation for success. We are focused on key markets, basically on infrastructure type of product. We are strong competitor in this type of markets. We offer strong differentiation and leadership in communication networks, enterprise computing, medical systems, defense and aerospace, industrial semiconductor, clean technology markets and multimedia.

Please now turn to slide 11. Our new strategy is being well received by our customers. This new strategy really provides a lot more value to our customers. We focus on our Company's strengths, we maximize, we focus to maximize value in each of our businesses as we separate these businesses to be independent. We are going to continue to invest in a higher margin opportunities markets. The goal here is to drive sustainable growth for many years to come. And we believe that our model, especially the way we set up today, has a significant leverage as the market improves.

So, to continue with my summary in the short-term; when you look at the first six months of our fiscal year 2012, we definitely see it as a challenging business environment. But we believe things will improve, basically this is a short-term scenario, because we are starting to see some positive visibility from our customers as they are looking at the third and fourth quarter of the fiscal year 2012.

So that is why we expect the second half to improve nicely, in components, because components typically get hit first in this type of environment, and products. And also, we expect our EMS business overall to improve nicely. We are well aligned with our key customers. Sanmina-SCI is a very valuable partner with each of these customers. We will continue to stay cautious in this economical environment. We are going to remain well disciplined and focused on our financial metrics, and our customers. ¶ Now I would like to take this opportunity to say thank you to all of you for listening to us today and giving us support. Operator, we are now ready to open these lines for questions and answers. Thanks again.

(Operator Instructions) Your first question comes from Wamsi Mohan of Bank of America.

Jure, you noted weakness from the Thailand flooding. I think Bob said $30 million, $40 million from shortages in fiscal first quarter. Can you share how that was split across multi-media and enterprise computing and storage? And what are you baking into your guidance in the second quarter from supply constraints?

Well, if I just look at the -- most of that came from multi-media, set up box business I would say as much as 60% of that. And then the second was a storage product and the third one was an optical. Going forward, it is hard to put the real number on it. We are still hoping to get some of these parts. Some of our customers are going out there and allowing us to pay more for these parts. So, we did factor -- as we give you guidance, we took some of those numbers out of it, but we'll see how things shake out. But definitely if I would have to put a number on it today I would say could be anywhere from $20 million to $30 million.

Okay, thanks Jure. And Bob, can you -- I know you don't break this out explicitly, but can you give us some sense of how much component revenues were down quarter-over-quarter, maybe relative to the total Company? Just trying to understand how much of the gross margin shortfall was mix driven versus revenue driven?

That is a good question. Let me try and frame it for you this way. If we look at the components areas in total, they were down about 17% sequentially. And as I said in my prepared remarks, the contribution margin is really high in that area. So while revenue is down 17%, we actually saw gross profit down by almost 50%. So it hits us really hard when we start to see the slow down there. What we have experienced over time is we get hit first and hardest with components and then as things start to get better that is the area we'll see the recovery in first, and obviously with the contribution margin, that will help us a lot.

Okay, thanks. I appreciate the color. And last one for me. Jure, you noted in your prepared remarks that you have input from customers that suggest that the second half should see some improvements. Are there particular end markets where you feel more confident that there will be a recovery in the second half? Which segments do you think there is a higher probability? And regarding the June quarter, do you actually think that the June quarter can grow year-on-year, or is that too optimistic? Thank you.

Well first, Wamsi, if you -- as I said earlier, the biggest impact that we had, if you compare our revenue from a fourth quarter, which will be our September quarter to December quarter, came in wireless access products. We believe that was mainly driven by correction of inventory at end customers, so those things have been used up. And we continue to have basically flat quarter right now. So what we see from our customers, the demand for those type of products will be start to pick up in our June quarter. And that is a substantial amount of business for us. So we expect that is one of the reasons. If you look at our other businesses, these smaller, what I say more diversified customer base, those seem like they are going to be at worst case flat and up. So when you look at the total, we are expect to really grow from here what we are today, in the June quarter.

Okay. Thanks for the color guys.

Your next question comes from Craig Hettenbach with Goldman Sachs.

Just a follow-up on the end market and expectations as we go through the year, demand improves. Anything you could point to, whether it is backlog or new design wins or programs that you have that gives you confidence that revenue growth in June quarter and beyond improves?

Well demand for us, as I said earlier, forecasting economy today still there is challenges there. And I don't want you guys to think that I know exactly how the economy is going to shake up. You always focus on things you control. As I said, I think there is a lot of positive stuff that we are working on. New programs across all the markets. But I think if you go look at the markets that affected us the most, in this first six months of this fiscal year, 2012, we believe those were mainly driven by extra inventory in the pipeline and some pushed out programs. For example, LTE, we got some new programs that we won on the LTE, but installation in some of those systems have been delayed. As we talked to our customers we believe some of those programs look promising, especially if you look out let's say two, three quarters out. Things like that, we talked about the defense and aerospace, that business stabilized. We don't expect the DOD business to come back overnight, but we are continuing to -- expect it to be stable but in the meantime, we are investing heavy both in our engineering and the business development in that business. So we expect some improvements. The weak markets that we also have really, I talked about the semiconductor equipment. We expect that thing to continue to be flat through at least first half of the 2012. But we do see some positive signs there that business might get a little better in the second half of 2012. So those are some of the examples. But again we'll continue to tune things up and we are fighting for everything that's out there. But we like what we have. We are -- it is not a time to panic. We are not panicking. We'll focus on things we control and just be ready so that we have a quick recovery, especially in our component businesses. We have a lot of upside, once the demand comes in. As the inventory gets flushed out, we expect our component businesses to his come back a lot faster. So I don't know if I answered your question there, but I'm trying to give you a little bit more of what's going on.

Okay. And then independent of the macro, can you talk about or rank by end market where you feel best from a new program activity for you going through the year?

Well I'm thinking about -- first of all let me talk about the market opportunity. The communication networking for us is still has the biggest amount of dollars opportunity as I look at rest of the year. But if I look at from a new programs win I'd say our storage product has a lot of opportunity for a new product wins that we are working on, and has a lot of upside, assuming that some of these programs that we work on become what they supposed to be.

Okay. And Bob, on the component margin. Outside of just a snap back in that business, and some better leverage there with improved sales, anything else the Company is working on to try to get margins up on the component side?

Well, in the short-term across the Company, we are focused on controlling costs, and taking care of everything we can in a short time frame, we don't believe there is a need to do any restructuring right now because we don't think the demand is a long-term trend. We think that things will be coming back. So it is basically get as lean and efficient as we can in the short-term and really take advantage of a recovery when we see it.

And if I can add to that I think if you just look at our components, we are really working, let's say, our circuit board side of the business, we're really focusing after some of the newer technology product. We do a lot of quick turns of the new programs so that what -- as marketing improves, we will be well qualified. We are trying to bring some new customers in to get qualified, and those type of things are positive. If you look at our -- for example our memory module product, we come in with a lot of new technologies and capabilities there. We expect that business to help us move as the demand goes up and then our mechanical systems group, again they've been impacted heavily by the big, heavy semiconductor industrial business. But if you look at the new programs that we are working on, there's lot of upside once these things turn up.

Okay. Thank you.

Your next question comes from Sherri Scribner with Deutsche Bank.

I wanted to ask about your outlook for revenue growth for fiscal '12. It seems like with the declines that we have seen in December and then the outlook for March, it is going to be hard to get revenue growth for the full year in fiscal '12. Do you have any sense of, do you expect revenue to come back pretty significantly in the second half so that we do see some revenue growth? Or is this going to be a down year and we recover in fiscal '13 after starting to see some improvement in the communications market? Or what are you thinking about?

First of all, we don't forecast that, we forecast one quarter at a time. But I would say as I just said earlier, Sherri, is that, if we arrived that the demand is going to come back, I think the Company's in position to, to have a quick recovery. But I don't think that I would like to at this moment, forecast what that recovery is going to be. But I personally believe that it is going to be better than what we are shipping today.

Okay. And then in terms of the shortages of parts, I think you ran through it. But I just want to clarify. Primarily the impact that you saw was related to hard dive shortages and then you saw some optical components? Was there anything else that you had a hard time getting in the quarter?

There were some other few things. But mainly for us was really the disk drives and some optical products.

There were semiconductors. There were a number of parts. But the material items are really the optical and the drives.

Okay, and it sounded like you expect the set top box business to see some additional drag, and some difficulty getting parts in the second quarter. But the server and storage market, that is probably going to be okay? They are not going to have a hard time getting drives?

Well, we have some challenges in a storage-ware market too. We are focusing on more higher end storage product there and the customer some cases, a fair amount of these cases you can get storage. The problem is how much you want to pay for it and some of these higher end markets, customers are willing to pay a little bit more and we think we have less challenges there.

Okay that is helpful.

Positive side, I think overall, overall, supplies is starting to improve nicely. I personally believe it is better than what was anticipated by industry 30 days ago.

Okay. And then in terms of the real estate that you have on the market, it seems like we have had that real estate on the market for a pretty long time. I mean, I know the whole time that I have covered you, you guys have talked about the real estate. Isn't there a way to reduce the price and just flush through that real estate and finally be done with it? I'm just curious why we still have that real estate for sale.

You're right. We have had offers on almost every property and we could liquidate it very quickly if we were willing to drop price. We are trying to make sure that we take our time and get a fair value for each of the properties. So this is our judgment call in terms of the length of time we are taking.

But we have been selling approximately $25 million to $30 million per year in the last couple of years, right, Bob?

Yes that's right.

Okay. Thank you.

Your next question comes from Jim Suva with Citi.

You made a comment about components are first hit and then and then rebound. The question I have is, if you hypothetically stay at these levels, sales levels, revenues levels for components, would you see more gross margin pressure? Or would it be consistent at these levels?

Well, I think at this level, the margins would stay consistent. If we -- and we are expecting that we've about bottomed out here.

And can you give us some details around your confidence and why you feel you have bottomed out here?

Well, as Jure said book to bill was slightly positive. Where it is discussions that our team's out having with customers. And it is -- we've got our finger on the pulse, and we know the way the supply chain works. And when people start to put inventory back on the shelves, the biggest impact is going to be at the component area and that is going to be -- and it's going to happen fastest there.

And just to add to that Jim, we are starting to at least, through our channels, starting to see there is less inventory in the pipeline, and we are starting to see some people where they are starting to expedite some of these what we call quick turns.

And is there the risk that one of your customers, such as Nokia Siemens Network, especially that one or just in general speaking because you don't like to talk about customers, and it may not be appropriate, who is going through some very material structural changes and breaking their company up and selling lots of units. If that business could go to some of your competitors and put us in another step down for the components in the EMS profitability and sales rate of the Company?

Well Jim, that is always risk in our business with any of our customers at any time, so since you mentioned that customer, I can tell you that our relationship is very strong. And I think we are in a very strong position, based on our performance and cost structure, that we know we can compete and we are delivering a great solution to our customers. So we don't, today we don't see any major risk in our customer base.

Great. And my last nit picky question. Restructuring. Are you guys pretty much done now? Or do you take another look at things here?

We definitely believe that things are going to get better than what they are today. We did all the major restructuring. In our business there is always tune up going on but there is nothing major planned on it at this time. Unless we are 100% wrong, and we are mis-forecasting what is in front of us. But we think demand will improve and as I mentioned earlier, we are building a Company for our future and each of our markets that we believe do have a lot to offer and our customer relations, if anything is going to grow.

Thank you and again Happy New Year, guys.

Your next question comes from Brian Alexander with Raymond James.

Could you talk more specifically where in the component segment you saw the weakness in the December quarter? I know you talked about 17% sequential decline in components revenue. Was it almost entirely in optical? Or was it more broad-based than that printed circuit boards et cetera? I'm trying to understand if the components weakness is really just optical and the optical is related to flooding or is it bigger than that and more demand related?

Okay, first of all, our optical -- so make sure Brian there is no misunderstanding, the way we report numbers today, our optical business is in an EMS bucket right now. Okay? What we have in a component bucket is the way we report today is really printing circuit boards backplanes, all the mechanical systems, enclosures, plastics, then we have a memory modules in there. So, that is what we call as a component. If you look at the business, the biggest impact in our component business really has been in printer circuit boards, backplanes and our mechanical groups enclosure business. Actually if you look at optical business for us, besides the, some shortages that we experience because of the flood, that business for us is stable. And I said in my prepared statements, if anything, some of the new wins that we are winning in optical today we are a lot more optimistic that optical business has bottomed out and is moving in the right direction.

Then maybe just expand on the 17% sequential decline in components which sounds like it is more related to PCB, and backplanes. Was it broad based across customers?

It will be printer circuit boards. More in the printer circuit boards and mechanical enclosure business, the vast majority of that.

Right. But was that broad-based cross end markets and customers? Or was it relatively concentrated?

That was across really all the broad-based from all customers.

Okay. And then just on the gross margins you talked about 7.3% gross margins lowest in several quarters and I understand the components business had a big impact on that decline, but looking forward what revenue level do you think you need to achieve to get gross margins back around that 8% level which you had been hovering around a couple of quarters ago? Thanks.

I think you almost answered the question. If you go and look at a couple quarters ago we were between 1.6% and 1.7% and definitely think that 8% is achievable at that kind of revenue level. It depends very much on the mix of the business.

Okay thanks.

Your next question comes from Shawn Harrison with Longbow Research.

Just a clarification first. Just wanted to make sure, with the gross margins down sequentially that much in the components business was it still profitable in the quarter on an EBIT basis?

From a gross profit standpoint it was definitely profitable, and we don't allocate all the costs out, so I can't really answer the EBIT question.

Okay. But definitely below the corporate average?

Yes, the gross margin was below corporate average this quarter.

Okay, and then when looking at the expectations for cash flow into the March quarter, where would you expect the cash cycle to be? And is that where you would expect it to hold for the rest of the year? Or would you see further improvement in the cash cycle beyond the March quarter?

Well we think -- part of what happened to us in the first quarter is the change in demand happened too fast for us to react and to get all the inventory out of the system. So we think we'll capitalize on that here in the second quarter, and generate pretty strong cash in Q2. And then the remainder of the quarter -- I'm sorry, the remainder of the year is going to be very much a function of growth rate and we'll see what the working capital requirements are, depending on the business that we've got.

Okay. I guess a use of $13 million of operating cash, would you expect to at least fully recover that? Or would it be something significantly higher in terms of the cash flow?

My expectation is we'll do significantly better than that.

Okay. Thanks so much.

Your next question comes from Lou Miscioscia with Collins Stewart.

Let me go back to the hard disk drive situation in Thailand. You generally hear that the retail areas is what is getting hit due to lack of availability. Obviously it came through in your numbers in multi media. Gibbon is going to be put in possibly a 30 million drive shortage. Wouldn't multi media end up being weak again sequentially? Or are you starting to see that area get more allocations?

Basically let me talk about our brackets that we are talking about. In my prepared statement Lou, I did say -- forecast the next quarter the multi media for us to be down.

In a similar level that we just saw now? Double digits?

Well, it is maybe not a similar level, it is a little bit less, but it definitely if you compare it to quarter-to-quarter, it will be slightly down.

Okay, and then switching over to OpEx. You had nice OpEx performance this quarter. But ticking up a bit. Given the tough environment, what is driving the tick up? I would have thought maybe you would have been able to hold it a little bit tighter.

The main thing is, the team did a great job in the first quarter and we shut down a number of facilities, right at the end of December with the holidays. And we won't be repeating that this quarter, that is probably the biggest change we'll see quarterly.

But we expect that to stay kind of flat.

Okay, thank you. That's it for me.

Your next question comes from Amit Daryanani with RBC Capital Markets.

Two questions. One, just on the communication side, it sounds like you saw a fair amount of softness there. Was it pretty steady throughout the December quarter? Was it fairly late, and was it both on the EMS and component side?

First of all, if you just overall communication, demand for us at the beginning of the quarter, we knew that things were soft. But during the quarter it continued to even get softer. And that mainly was driven by that wireless access product, in our case. But the components, because we do business components a lot more diversified than any of our businesses. When you look at circuit boards, it's got hundreds and hundreds of customers, even the customers who don't do any EMS or mechanical or plastic and so on. So those -- that customer base is a lot more diversified than EMS. So we definitely, based on our analysis, if you look at the whole circuit board industry today or some of the enclosure factories, plastic factories, if they focus on infrastructure product like we are, they had typically demand was pretty weak. And again, mainly driven what we see by the, by inventory, as that inventory flushes out, we expect that business to come back, a little bit sooner than the system business.

Got it. Mainly just go back on the OpEx question, the way I was almost looking at this, is if I look year-over-year for Q1, OpEx was basically flat at $60 million but revenues are down 10%, 12% year-over-year. I would have thought OpEx would have gone down at least in line with revenues. Could you help me understand why did that not happen and what the offsets mainly were?

Again, we are down in OpEx probably about as lean as we can get here in the December quarter. And if you look at last year, at Q2, Q3, we were in the $63 million, $65 million range. So we are continuing to make investments, we are investing in areas like R&D. We are not going to jeopardize the long-term by cutting back in some of those areas. We are also continuing to invest in business development and making sure that we are bringing in business. So, I think OpEx is actually pretty lean here.

All right, and then finally on the debt deal that you guys announced, $150 million, that would add about $0.03 on a quarterly basis in the June quarter and beyond. Is that roughly the right amount to think about?

Yes, that is about right. I think I said on an annual basis it is $0.14.

All right. Fair enough. Perfect. Thank you, guys.

Your next question comes from Osten Bernardez with Cross Research.

I just have a one quick question. Would you be able to provide a breakdown for the sequential decline in your gross margin?

Breakdown? You mean by product area or by margin area?

Yes.

So we really don't drill down a lot. I try to give some indication in terms of what's going on with the Company and what's going on in the components areas. But we don't give a lot of information beyond that.

Okay, understood. And lastly, just to clarify with the near term weakness that you are expecting within your semiconductor business, is that more a market call? Or is that a Sanmina specific or customer specific, depending on what you had?

We try to be expert in the markets, but Osten, we tried to really look at our customer base. We are well diversified in that market alone, so when we thought we really -- we talk about our customers. We all know if you look at our competition, we all have different customers in some cases. But even if you have the same customer, most of us involved in different programs, so we all get affected a little bit differently. So, we try to give you as much as information as we can about our business and so the way we analyze things is that what our customers, and we say we look more optimistic, is with what we are seeing from our customers, and based on that information, based on the forecast that we look every day, we adjust our decision making in our areas. And that is what I said, what we see today is that the second half for us, it looks a little bit more promising. And if that is the case, we should deliver a lot better results and we believe in those, but in the meantime, we continue to focus improving the things that we can work every day on.

All right. Thank you.

Operator, we have time for one more question.

Okay. And your next question comes from Christian Schwab with Craig-Hallum Capital.

A couple of quick questions. Just following up on the previous gentleman's question. On the semi-cap equipment you guys described that that business would you think will be weak obviously in March but it might be challenged for the next couple of quarters after that, did I hear that right?

I think it was after that I said might be challenging for next quarter. But I think as we come in on the last two quarters of the year, it could -- we could see some improvements, based on the programs that we are involved in.

Okay. And then, you talked a couple of quarters ago, when business was a little bit stronger, that you thought new product design wins and a stable economy could lead to double digit year-over-year revenue growth. Obviously, that's not occurring. Is there, I'm just trying to get, as I'm sure everyone on the call is, an idea of what the slope of this recovery is going to look like. So if March is the bottom, I mean, what would you know, let's say we do $1.5 billion. What would it take to do $1.7 billion again, like September of last year? How do we get $200 million in revenue? Do you see a path to that? Disk drives become available, we get, call it $50 million back. Where would the other $150 million come from?

Christian, as you know, we really give guidance out one quarter at a time. What we are trying to do is give some indication we feel the second half is going to be stronger than the first half has been. And as you said, we think that probably the March quarter is the bottom. We are at the same level we have been at here in the December quarter. And the early indication from our customers, across several of the market areas, is that things are going to get a little better. But we can't control that. So it is awfully hard for us to give you a specific road map on what we think revenue is going to be in the June quarter right now.

But to add to that Christian, is that Company, assuming that demand is there the Company's ready to execute on that immediately and that is what we are positioning, and that is why our overall SG&A, we are staying flat here because we still believe there is a lot of upside for us. A lot of opportunities, and we are still believe what's in front of us, we are excited about the future. Of course we don't control the economy, but once the economy turns around, we have a lot of opportunities to grow this business.

All right. And then my last question. On the enterprise computing storage business last year, we faced some headwinds with some larger programs transitioning away to new programs that began to ramp. As you go through fiscal year 2012, are you aware of any large programs that are transitioning away to newer programs that could cause disruption?

Well first of all, if we look at that segment for us today, I think we are a lot better positioned today for upside in that market than we were let's say a year ago. For a couple of reasons, we developed a strong, technical capabilities to drive that growth. We are shipping fair amounts of new projects. Some of these projects have a good opportunities. We are working on some new exciting projects that are in front of us. All depends how these things shake out, but yes, I am positive what's in front of us, especially if I look later part of 2012.

Great. No other questions. Thank you.

Well ladies and gentlemen, that's all we have for today. Appreciate your support. And if you have any more questions, the ones, especially the ones that we didn't answer, please give us a call. With that, thank you very much.

Thanks.

And this concludes today's conference call, you may now disconnect.