Sanmina Corp (SANM) 2012 Q3 法說會逐字稿

Good afternoon. My name is Natalie and I will be your conference Operator today. At this time I would like to welcome everyone to the Sanmina-SCI third-quarter fiscal year 2012 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer session. (Operator Instructions) Thank you. I'd now like to turn the call over to Ms. Paige Bombino. Ma'am, you may begin.

Thank you, Natalie. Good afternoon, ladies and gentlemen. Welcome to Sanmina-SCI's third-quarter fiscal 2012 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 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 statements of operations for the three months and nine months ended June 30, 2012 on a GAAP basis, as well as certain non-GAAP financial information. A reconciliation between the GAAP and non-GAAP financials is also provided in the press release and slides posted on our website. In general, our non-GAAP information excludes restructuring costs, acquisition and integration costs, non-cash stock-based compensation expense, amortization expense and other infrequent or unusual items to the extent material. Any comments we make on today's call that 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. Also, thank you all for being here with us today. With me today on this conference call is Bob Eulau, our CFO.

Hello, everyone.

For our agenda, Bob will review our financial results for our third quarter. I will follow-up with comments relative to Sanmina-SCI results and future goals, then Bob and I will open for question and answers. And now, I would like to turn this call over to Bob.

Thanks, Jure, and thanks again everyone for joining us today. Please turn to slide 3. Overall, the third quarter was much better from a revenue perspective, but was challenging from a margin standpoint. Revenue of $1.55 billion was up 5.9% on a sequential basis. And down 7.5% from the third quarter last year. This was above the high end of our guidance of $1.475 billion to 1.525 billion. Our gross margin came in at 6.8%, which was down 60 basis points from the second quarter. Operating margin declined 30 basis points from last quarter to 2.8%. Non-GAAP earnings per share was $0.26, which was at the low end of our guidance for the quarter. This was based on 83.6 million shares outstanding on a fully diluted basis. Finally, cash generation was strong this quarter with cash flow from operations at $48 million and free cash flow at $34 million. I'll discuss cash more in more detail in a few minutes.

Please turn to slide 4. Revenue was up 5.9% or $86 million from Q2 to $1.55 billion. From a GAAP perspective, we reported net income of approximately $9 million which results in earnings per share of $0.11. This was up relative to last quarter by $0.13. The GAAP results included a $4.2 million charge for the call premium and unamortized issuance costs associated with the redemption of $100 million of debt during the quarter. Restructuring costs totaled about $3.9 million for Q3. The costs primarily reflect what we've been recognizing as expenses are incurred related to real estate. Looking forward, we'll continue to see some ongoing restructuring charges on our GAAP P&L of approximately $3 million to $4 million per quarter that primarily relate to real estate which is being held for sale.

My remaining comments will focus on the non-GAAP financials for the third quarter. At $106 million, gross profit was down $2 million from the prior quarter. Gross margin came in at 6.8%, which was 60 basis points below the previous quarter. Gross margin was lower than we had anticipated for the quarter, primarily due to lower profitability in the components business and a one-time foreign exchange exposure that was not fully hedged. The components business was a disappointment, and we are aggressively evaluating alternatives to quickly improve profitability in this business.

Operating expenses were down $1 million for the quarter at $61.8 million. This represents a 30 basis point improvement in operating expenses as a percent of revenue. At $44.1 million, operating income decreased by 1.5% from the prior quarter. Operating margin was 2.8%, which was a 30 basis point sequential decline. Other income and expense was at $18.4 million, which reflects a reduction in interest expense offset by foreign exchange losses during the quarter. The tax rate for the quarter was 15% of pre-tax income, which was in the range we had expected. On a non-GAAP basis we earned $22 million in net income or $0.26 per share. Net income was down 3% from Q2. And earnings per share was down 2% from Q2.

On slide 5, we're showing you some of our key non-GAAP P&L metrics. Revenue was up $86 million from last quarter. Demand was particularly strong in the communications and the defense, medical and industrial segments, which more than offset continued weakness in the multi-media segment. Compared to Q3 last year, total revenue was down 7.5%. The big challenge continues to be the components revenue which was down 2% sequentially and 19% from Q3 last year. Moving on to gross profit. We saw a 1.6% decline in gross profit in Q3 while gross margin declined to 6.8%, which was down 60 basis points from last quarter. Our operating profit declined 1.5% from last quarter to $44.1 million. This led to operating margin of 2.8%. Net interest expense declined by $4 million this quarter as we continue to see the benefits of the ongoing deleveraging of our balance sheet.

Now I'd like to turn your attention to the balance sheet on slide 6. Our cash and cash equivalents were $395 million. Cash was down $69 million from the previous quarter. The decline in cash was driven by $100 million in cash used to redeem long-term debt, which was partially offset by free cash flow of $34 million. Accounts receivable increased by $88 million while accounts payable increased by $62 million. Cash benefited from a $35 million reduction in inventory during the quarter. Property, plant and equipment was down $11 million for the quarter due to low capital expenditures.

Please turn to slide 7. Solid cash generation, combined with some well-timed capital markets transactions, has allowed us to make great strides in our overall financial strength. Over the last four years, we've reduced our long-term debt by $500 million. Today, we redeemed the remaining 2016 notes with significantly lower-cost debt. These collective actions have lowered our annual interest expense on a run rate basis to just under $60 million. Combining this with the fact that our next major debt maturity is in 2014, we feel very good about our capital structure. With all the progress that we've made in the last year, we still have room to improve the capital structure and balance sheet going forward, and we will look for those opportunities.

Please turn to slide 8 where we will review our balance sheet metrics. Cash was down $69 million from Q2 for the right reasons that I just mentioned. Cash flow from operations for the quarter was $48 million, and net capital expenditures for the quarter were low at $13 million. This led to $34 million in free cash flow. Inventory reduction and cash generation are an ongoing priority for our team. Inventory decreased from $862 million last quarter to $827 million this quarter, while the inventory turns improved from 6.1 to 6.8. Compared to Q3 last year, inventory is down $59 million.

We're showing you cash cycle days which combines our cycle time for inventory, accounts receivable and accounts payable. Overall, cash cycle time decreased from 59.6 days last quarter to 55.2 days this quarter. The biggest driver was a decrease in inventory days of 6.1. The favorable inventory days were partially offset by a decrease in accounts payable of 2.3 days. Our accounts receivable day sales outstanding improved by 0.7 days. We were pleased to see progress in our overall cash cycle time. Finally, return on invested capital was at 10.8% for the quarter, which was impacted by our lower profitability, while asset utilization improved.

Please turn to Slide 9. I would now like to share with you our guidance for the fourth fiscal quarter of fiscal year 2012. Our view is that revenue will be in the range of $1.575 billion to 1.625 billion. We expect that gross margin will be in the range of 6.9% to 7.3%. Operating expense should be $63 million to $65 million. This leads to an operating margin in the range of 3% to 3.2%. Assuming no large foreign exchange surprises, we expect that other income and expense will be in the range of $14 million $16 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 84 million shares plus or minus 500,000 shares. When you consider all of this guidance, we believe that you will end up with earnings per share in the range of $0.32 to $0.38. Finally, for your cash flow modeling, we expect that capital expenditures will be around $25 million, while depreciation and amortization will also be around [$25] million. We expect that we will generate positive free cash flow this quarter as we continue to adjust our working capital levels.

From a GAAP perspective, next quarter will likely mark three years of cumulative profitability in the United States. This event, together with our future expectations of continued profitability for our US operations, means we expect to release a portion of our valuation allowance for income taxes in the fourth quarter. The release will be recorded as a one-time benefit to income taxes. This means that we will likely see a major one-time improvement in profitability as we partially recognize the value of deferred tax assets that are currently not reflected on our balance sheet. The total impact on the balance sheet and income statement could be $100 million or more, subject to the completion of the analysis.

Overall, we're navigating through a challenging macroeconomic environment. We will continue to focus on improving profitability in the components business, while we expect overall revenue to continue its recovery. We will focus on improving our performance in fiscal Q4, while positioning ourselves for better results in fiscal year 2013.

At this point I will turn the discussion back over to Jure for more comments on our target markets and our business strategy.

Thanks, Bob. Ladies and gentlemen I would like to add a few more comments relative to our results. Our view of business environment, first of all, for June quarter, I'll talk about short-term business environment, September quarter. And then I'll make a few comments about our outlook for the rest of the calendar year 2012.

So let me give you additional recap on the third quarter. First of all, revenue for the third quarter was up nicely 6% as a result of growth in number of our key markets. The key markets -- communications, medical, industrial, defense and aerospace -- we saw nice growth. Enterprise Computing and Storage was slightly down, basically flat. And multimedia we had a weak demand.

Let me make a few comments on our component businesses. We continued to experience weaker demand in component businesses, as Bob mentioned, such as memory modules, optical, printed circuit boards and mechanical components. For business, overall growth was driven by new demand from some of our key customers and new programs.

And now please turn to slide 10. As you can see on this slide, our top 10 customers represent 50.8% of our revenue. Also in this quarter, we had two customers around 10%-plus of revenue. Let me make a few comments on this segment. First of all, Communication Networks was nicely up, 12.9%. We had good demand from existing customers and also demand for our new programs. Enterprise Computing, as I mentioned, was basically flat, 1.5% down. We had a few delays in the program but overall a lot of new opportunities in that. And I'll make more comments later. Defense, Industrial and Medical were nicely up, 8.6%. I think the only segment that was down in that group was the semiconductor but as you can see Defense, Industrial and Medical were nicely up. Multimedia continues to be weak for us, mainly driven by set-top box. We also had some negative demand in our automotive electronics part of our business.

So to make more comments about our segments, could you please turn to slide 11. So now let me give you some fourth-quarter highlights. If you look at the Communication Networks group, we expect that group to see continued modest improvements in our fourth quarter. This can be mainly driven by some of the new opportunities with existing and new customers and especially driven by our 4G programs and some other new programs in Communication Networks. Enterprise Computing and Storage continued to be stable for us and we expect it to be up for the quarter. We have a fair amount of opportunities for new projects and we believe that these new products will drive the growth for our fourth quarter.

Defense, Industrial and Medical we are forecasting up quarter. Let me break it down by each market. Defense, we expect to be stable and improving slightly in the quarter. For industrial we have a strong pipeline of new projects. We expect it to be nicely up. Medical, we are forecasting flat but we do have some upside potential there. Again, only segment in that group is a semiconductor that we are forecasting down for our fourth quarter. This market segment continues to be big for us. Multimedia, for the whole group we are forecasting down fourth quarter, mainly driven by set-top box business. On the positive side, other businesses are doing fine. Gaming equipment and other products are going to be up. We are also forecasting automotive to be flat. And we also have some nice upside potential in the quarter.

To continue with the rest of the calendar year 2012, as Bob mentioned, in this macro environment, will remain challenging for some of our end customers, and it is difficult to predict the future at this time. But on the positive side we're starting to see some positive activities. We are benefiting from new projects that are starting to ship at the higher rate now and should continue for the rest of the calendar year 2012. This is mainly driven by some key customers' present forecast, new projects that are starting to drive revenue, and additional new projects in the pipeline should be starting to contribute soon. So based on forecasts and new opportunities, we're cautiously optimistic about the rest of the calendar year 2012.

Let me make some more future market comments. First of all, start with the component businesses. We are still experiencing a lot of inventory correction within our industry. Components inventories at our customers are at the lowest level than what I've seen in a long time. So based on this and some improvements in the market, we do expect to see improved demand in our component businesses in the December quarter. Again, as Bob mentioned, for component businesses in this environment, we are looking at all opportunities to improve profitability. Now let me make a comment on bookings. Book-to-bill in the third quarter were positive. And book-to-bill for the fourth quarter we are forecasting to continue to improve over the third quarter. So overall market opportunities remain attractive as Sanmina is focused to drive sustainable growth in our key focus markets and where we provide competitive advantage for our existing and new customers.

And now please turn to slide 12. In summary, we had good revenue growth in the third quarter. Also, we have positive growth momentum for the fourth quarter, a strong pipeline of new projects that I just talked about. In this environment we expect to continue to generate positive cash flow from operations. And again, we are cautiously optimistic about our near-term growth.

So ladies and gentlemen, now I would like to thank you again for your time and support. Operator, we are now ready to open the lines for question and answers. Thank you again. Operator?

(Operator Instructions) Wamsi Mohan from Bank of America Merrill Lynch.

It's surprising that you had such a significant bead on the revenue line. And, frankly, your segments also came in more or less as expected, but the margins were quite different. And you alluded to two factors -- component profitability and FX. I was hoping maybe you could tell us what the relative contribution of each of those were? And what specifically was different between components? Given that segment revenues were more or less in line with what you had expected, how were the component revenues different from your expectation? And what specifically are you doing to address the margin opportunity in the components?

Wamsi, let me make a couple comments and I'll turn this over to Bob. First of all, as I mentioned, we've been going through inventory correction in component side of the business now basically, is what I would call third quarter in a row. As Bob mentioned, if you just look at the comparison quarter to quarter, our component business is down over 20%. So that gets a big impact because these are the businesses also that our margins are a lot higher.

As I said earlier, I believe I never seen more inventory correction in short period of time as I seen it really in the last 90 days. So inventories are very low in the pipeline right now. We are not forecasting huge upside in our component business during the fourth quarter. But as I mention earlier, I believe we're going to start seeing some demand in the fourth quarter and we expect those margins to come back. So with that I'll just turn it over to Bob for additional comments.

As I've mentioned before, the components businesses are very high contribution margin. As of course you know, they're also high fixed costs. So year-over-year revenue is down about 19% on the component side. And that puts a lot of pressure on our gross profit when that happens. What we've told the team is everything is on the table. We need to figure out how to improve the profitability on these component businesses and not just wait for revenue to come back. We think revenue will come back but we're not going to wait. So we're definitely going to be looking hard at things this quarter.

In terms of your first question, which I think was relative impact of the FX issue versus the components business, the components business was definitely the bigger of the two impacts. I can tell you the FX impact probably hurt us in the neighborhood of $0.02 to $0.03 per share this quarter. And components, I don't want to quantify that specifically but it was higher impact than that.

Okay, thanks a lot, guys.

Jim Suva from Citi.

Thank you, Bob and Jure and for your team there at Sanmina. A quick question. On the prepared comments, I believe it was Bob mentioned looking at alternatives to improve the profitability in the component sector. That type of word carries a lot of potential routes that could be with it, all the way from closing the business, selling the business, or just new management changes, or inventory correction. Can you walk us through about, are you looking at such severe actions or am I just taking that word out of context?

Jim, this is Jure, hi. First of all, you're right. You can take that a lot of different directions. I think for us, every time we had this correction of components now for multiple quarters here. And based on all of the data, as I just mentioned, I believe that the demand will be coming back because pipeline and inventories are very low. But at the same time, we want to make sure that we look at everything and we tune up and make improvements necessary.

As you know, in our circuit board business, we invested a fair amount of money to grow our China factory. That factory is now finished. So for long term China is the place for us to be. And when we move to China we are really focused on high technology printer circuit boards. So the whole new factory is really set up to be able to do high technology. So we are just looking at all things, what is the most efficient way going forward, and what we have to do to improve the margins even if the demand doesn't come. So with that, Bob?

Yes, just to echo Jure's comments, we're very committed to these businesses. We're continuing to make long-term investments in these businesses. We're very committed to serving the customers in each of these areas, as well. So don't read too much into that. On the other hand, you can read into the fact, we are not satisfied with the status quo so we need to find ways to improve the profitability in this business. And we intend to put a lot of energy into that over the next month or two.

As a follow-up, just a comment and then a follow-up question. The comment is, I know a lot of people are pretty worried you've changed a lot of management there. So it seems like you've been focusing on it a lot. So it seems like a renewed emphasis may mean something potentially a little more drastic. Or maybe I'm reading more into it. But the follow-up question is -- is components largely tied to some of the segments more than other? Meaning multi-media? And, for example, the volumes and the quantities going through there have a disproportionate impact to components' profitability than, say, in industrial or defense segments?

First of all, let me answer your first comment there. First of all, let me answer with the management. We did not make a lot of management changes. As you know, about 1.5 years ago, we made a change with the one key manager. So internally, we have a very strong management internally. A lot of the positions we've been filling from inside. So we're very happy with what goes on. So there's no management changes going on and I don't see any in the near term or long term today. So I just want to make sure that is clear.

Jim, to answer your second question, when it comes to multimedia, especially set-top boxes, we do very little components vertical integration. I should say, we don't build boards for that. We do very little plastic or metal on that. Our component business is really more impacted in enterprise side and optical side of the business; solid state, memory side and high technology printer circuit boards, and the precision machining. So precision machining has been affected, of course. The semiconductor being down, it's been a factor in that area. So that's what the biggest impact is. But really it's not related to set-top box at all.

Great. Thank you very much to your and your team at Sanmina.

Craig Hettenbach from Goldman Sachs.

Yes, thanks. Jure, can you start with just the top line in the quarter and the guidance? Is there any way for you to give some context around what you're seeing from the end markets versus new programs? Because the top-line results I think are better than some others out there.

Thanks, Craig. First of all, we had a nice pick up with some existing customers during the third quarter. These are all newer programs. LT installation has been going off. So we have good programs there as I mentioned; 4G programs and so on. If you look at also in other areas, both the enterprise and storage, some of the other industrial side of the business, we've been working some of these new programs for a long time. So those are starting to contribute fairly.

We also have a strong pipeline. So we think, at least what we see today -- we're taking one quarter a time so we are guiding up for this quarter, both on top line and bottom line. And I expect, based on everything I see today, unless the whole world changes tomorrow, that will continue through the December quarter. And then I guess 90 days from now I'll be a little bit smarter, or I should say we'll be a little bit smarter to forecast longer term. But I like our chances.

As you know, we made the decision to go with a new strategy that is focused on our more complex type of products, investments in these things take a little bit more money. So if you look at our defense business, we're building on that. It's not the sexiest market to be in right now but we're building for the future. We've been investing heavily in our storage enterprise there. We've been heavily investing some new technologies such as solid state drives in our memory module business. We are investing a fair amount in our optical technology and optical capabilities. So a lot of these investments are starting to pay off. And hopefully the economy will cooperate. And as we have more demand for higher technology products, I think we should see a more benefit from that.

So to summarize, yes, I think a fair amount of demand is coming from the programs that we have here for a few quarters. And also the new programs are picking up in some of the new wins at existing customers and new customers.

Okay, thanks for that. And if I could have a follow-up for Bob. When you look at the gross margin, the range 6.9% to 7.3%, at what point do you think you can get back to the mid 7%s -- 7.5% or so? And would you consider cost actions to get there? Maybe you can guide us through how you might get back to that level.

Again, we're just providing guidance one quarter out. But clearly we're counting on improved mix. We're expecting some progress in the components business. We wouldn't put the guidance out there if we didn't think that was likely. We did get hurt a bit, as I mentioned, by one-time FX impact in the current quarter. I don't want to speculate as to when we'll be back to mid 7%s or above, but we're pretty confident in the range of guidance that we're giving for the September quarter. And with a combination of the revenue coming back and hopefully finding some opportunities to improve our performance on the component side and we should do even better.

Okay, thanks.

Brian Alexander from Raymond James.

Yes, first to clarify, guys. Was the components business down 20% sequentially or 2% sequentially? I heard two different numbers. I know I heard 19% year-over-year decline but I'm not sure about sequentially.

Sequentially it was down 2% and, as you said, 19% year-over-year.

So I don't understand why components were such a drag on gross margin, maybe 50 basis points or so, if the revenue was only down 2%. That doesn't seem like a big drop. So it implies more of an execution issue than weak demand or inventory rebalancing. Or maybe I'm just missing something.

Actually I would characterize it more as a mix issue within the components areas. And we obviously have a mix impact at every level in the Company, and within components it hurt us a bit.

Can you just elaborate on what you mean by that, Bob? Because when you talked about the parts of the components business, or maybe Jure mentioned it, that were weak, it sounded pretty broad-based. I think you pretty much mentioned all of the different sublayers. So what specifically was weaker than you'd expected? And was that driven by demand weakness or inventory or was it more Sanmina execution specific?

In terms of each of the component areas, I would say -- and I'm doing this by memory -- I would say all of them were below what we had expected going into the quarter. And then within each of those areas, there's a certain mix of product that we're expecting to ship and that was not as good as we had hoped, as well. In terms of execution issues, you always have some issues here and there but it's hard to blame the team on that. I think the bigger issue was continued slow revenue and the mix of revenue that they saw.

If I can add?

Sure, Jure, go ahead.

If I can add to that, really, if you look at from execution point of view, really that's not an issue this quarter, as Bob said. In this business there's always challenges but that's not an issue. It's the mix issue, especially when you get into, like for example, our memory business. Like our solid state drives are very profitable. That business was down. Some of the custom memory modules was also down; some of the optical components. And additional to that, very weak circuit board demand on our high-end boards. And our mechanical business was weak. So you add those four together, especially with the mix, that's how we get impacted the most.

Okay. And did you lose money in components, just to clarify that?

We still have gross profit on the components side, although it was down a little bit from the prior quarter.

And just the final one. How much of the rebound in gross margin for September is being driven by the improved components margin? Because it doesn't sound like you're expecting the revenue to bounce back really until December. So just trying to understand why the gross margins would come up so much in September. And that's it, thanks.

We're expecting some improvement on the component side and a slight improvement on the EMS side, as well.

Okay, thanks guys.

Sean Hannan from Needham & Company.

I'm sorry to follow-up around components here. It sounded like for some of the prior quarters there was some anticipation around some improvement within that business. You're now talking about that later in the calendar year. Can you give us a little bit more detail around what gives you the confidence behind those improvements, either from a booking standpoint. Is there is a tie -- and I think this was alluded to in an earlier question -- is there a tie to a given end market where you have more component content where, perhaps, some of your new programs may be ramping and taking a greater pull of those components. Any clarity around the back end of the calendar year would be helpful.

Sean, this is Jure. Let me try to answer that as direct as I can. First of all, if you really look at the components industry today, the circuit board industry, the precision machining, if you're involved in semiconductor precision machining and the military precision machining and areas like that, demand has been pretty weak. So even then if you go into some of the custom memory demand, it has also been weaker than normal. That's the same thing what we are experiencing here at Sanmina. As we looked at the fourth quarter, which for us is the September quarter, we see some stability, not a major upside. Hopefully the mix itself will be a little bit better. We see some mix based on the forecast what we've seen today.

And then, as I said earlier, based on knowing our customer base, knowing the programs that we are involved in, knowing what inventories are in the pipeline in some of these key programs that we are involved in, we expect things to improve, as I said earlier, unless whole demand falls off the cliff. Based on what we see today, that's what we are expecting to see in the December quarter. So, in summary again, some mix improvement in the September quarter but more demand that will offset just not the mix alone, but to fill the factories up. Because some of these factories, as Bob mentioned earlier, it's a high fixed cost. So as the demand goes up, fair amount of that falls to the bottom line.

Okay, that's helpful. And then also, just from a 100,000 foot perspective, when you look at the opportunity for growth within your business, when you look at September and when you look at December from June, those growth opportunities, would those really be coming much more from newly outsourced business to the industry? Or is this a matter of share gains? Because I think most of your peers, as well as when we look at the end markets, we're looking at general sluggishness and stagnation. So just trying to understand your ability to grow there and the dynamic that's behind that.

Sean, we've been diversifying our segment. If you look, we have a high percentage, 48% this quarter we just finished in Communication Networks, which includes networking, wireline and wireless. So we've been really focused, expanding our storage business, including Sanmina's products, all the OEM products. We've been really driving the industrial side of the business, medical, aerospace and defense. These are all areas that we have been focusing. And a lot of these things are really based on our mix. It's a customer driven.

So for us in a short-term across our customer base we see some upside. That's why I say modest upside in September. And everything we see today, we believe that upside will continue in December. We don't know how much but we definitely believe it's going to be upside. So yes, we have some existing programs that have been with us for a long time that are doing well. And also the new programs in a customer base that we have and some of the new customers are starting to drive the growth.

Okay, thank you, Jure.

Shawn Harrison with Longbow Research.

Just wanted to delve into the multimedia business a bit, maybe if you could. In terms of particularly set-top boxes, are we getting close to maybe seeing a bottom in the demand environment? And with it being down into the September quarter, how much is down? Is it mid single digits? Is it greater than that?

First of all, we don't have a lot of customers in that business. It's the business for us long term we think it's going to be less and less. We believe it's going to level off. If I had to forecast, probably next three to four months. But the long term for us, it's not a business that we are going to see a lot of growth with our customer base.

Okay. Are you walking or are you backing away from some business? Or is it just more a function of the end demand for the product?

We usually don't like to make a comment on that, Shawn. We don't like to talk about specifically about our customers. They don't want us to talk about it, to make sure that it's clear. So I can't make a comment on that.

Okay, fair. And then, just, Bob, as a quick follow-up, given no debt coming due until 2014, how do you look at incremental cash deployment going forward? Or is it slowly just building back to cash balance?

I'd say our priorities are what they have been for quite a while. First of all, make sure that we've got the cash we need to grow the business organically. And we're really pleased to see the sequential growth this quarter and still have the ability to generate cash. So I think that bodes well for the future. So it's, number one, have the cash you need to grow the business.

Number two would be small, very related, tuck-in type acquisitions. Don't expect anything dramatic there. Be something that's a very good fit with our existing strategy. And then, third, we'll continue to opportunistically look for opportunities to delever the Company. And make sure that we're doing the best possible job we can to return value to shareholders.

Thanks so much.

Christian Schwab from Craig-Hallum Capital.

Bob, were there any 10% customers in the quarter?

There were two customers above 10% this quarter.

Can you name them?

No, unfortunately we only do that once a year.

Okay, I figured that would be the case. Jure, when you look at the strong pipeline of new projects, would you categorize the recovery and growth momentum that you're seeing as increased market share? Or would you say it's more a ramping of a next-generation product as an older generation product decreases? So, in other words, we're still selling to the same people and before we were building 3G base stations and that grew really nicely, and then that slowed down. And now 4G LTE base stations in essence are increasing and we're just selling to the same customer but seeing increased demand because of acceleration in that product. So you don't have to go -- I'm just trying to categorize how much is increased market share versus just customer demand for a next-generation product that you've always won that's finally going to ramp production.

Yes, Christian, that's a fair question. We definitely believe that -- I don't like to use the share gain because people can read too much into that. We basically widened our customer base that we've been focused on for the last couple years. We've been expanding and that pipeline is helping us today. And we also believe there is a fair amount in the new pipeline that we have been working on these new opportunities that we have been working on. Some of these opportunities are existing customers and some are just new customers.

But on top of that, your comment about in old days we were building a lot of 3G and now we're building a lot of 4G base stations. Some of that is going on, too. So definitely, we had an existing customer base that is ordering -- have higher orders. But that alone wouldn't get us where we need to without new programs.

Right, thank you. And my last question, is there any areas or segments that you can break out, further giving greater clarification to questions earlier about growth drivers into new markets where you could say two years ago we weren't in this category of industrial equipment and now we're doing $50 million a year? We weren't making these type of servers two years ago and now we're doing $200 million a year. Is there anything like that you can clarify for people?

Let me try to answer it a little bit differently. I think it's important to look at Sanmina here, what we've been doing. As we've been diversifying our customer base, as we went with a new strategy, that we're going to focus on a more, what I call, sustainable, predictable long-term business, we have to walk away from certain businesses. And so it did not show as much growth. But I think the quality of the customers we have today is improving. And I do believe the pipeline, what we have across our key markets, including communication, enterprise computing, the medical, defense, industrial -- if you look at the pipeline, some of the wins that we got, and how we are positioned for future, a lot more exciting. And I think they will be a lot more sustainable and predictable.

I think the biggest problem with our industry in the last five years is we're not being that predictable. And to me, because I think we have been -- as an industry sometimes we chase the revenue without really focusing on quality of the customer, how sustainable it is, and how we're going to make a little bit of money in the future. We have been very disciplined trying to do this. And we're really not focused strictly on what we're going to do short-term, is really what we think we're going to do in the next 12 months, 18 months, 24 months as this environment hopefully improves that we are in today. We are in a challenging environment. But I believe that Sanmina is well positioned as this environment improves. Hopefully that answers your question, Christian.

It did, kind of. But it's probably all you can share anyway. Thanks. Great quarter and congratulations on reducing the cost of the debt.

Sherri Scribner from Deutsche Bank.

I just wanted to dig again into the components business. Just back of the envelope, it seems like the components business was about a 20 basis points drag this quarter with FX being the rest of it. As we move into the fiscal fourth quarter, you've talked about aggressive plans to improve the components market. But you've said you don't want to get rid of any of those businesses. And you also said that you didn't see any execution problems with your components group. So I'm trying to understand, as we move into the fourth quarter, what improves? Is it primarily mix or are you also relying on an inventory refresh?

Sherri, this is Jure, hi. First of all, let me answer your second part of the question and then I'll give the first part to Bob and he can make additional comments. First of all, as I mentioned earlier, if you look, in each business you have to really look at your customer mix, what mix there is and so on. As I mentioned, when we say components really affects optical memory module, which is both solid state and flash, the custom memory modules that we build involves high technology, printed circuit boards, the back plans. In mechanical it's a precision machining, large system, and so on. We believe that the inventory, the customers that we serve today, are very low. And based on that data, and we are assuming that the environment will improve in December for higher demand for components, it will help us to, how do I say, get out of this jam and start shipping more and hopefully deliver a better margin from this business. That's really what we are saying.

At the same time, what we are saying we are going to stay very aggressively in the short-term. Because to run this business, we can't just wait until let's assume these big orders are going to come tomorrow. You've got to do both. We've got to tune up everything we have, making sure that we turn every stone. And at the same time, we are going to be very aggressive chasing every good order out there that is going to be available. But we are very positive on this business. We have been focused on this for a long time.

I think if you look at the capabilities that we have in each of these businesses that I just talked about, they are basically second to none. So these are great businesses. We just need more demand for them. So that's my answer for the second question. I'll turn it over to Bob to talk about margin.

Sure. Hi, Sherri. As you know, we don't do segment reporting so there's only so far I can go in terms of describing this business to you. I can tell you, at the level of revenue we're operating at today, the business is very high contribution margin. So, as we see revenue come back, we should be able to drive very good gross profit. But I really can't get into whether it's 20 basis points or 50 or whatever. It's just that, as we've outlined, you can rest assured that the biggest issue is components profitability and that's what we're spending our energy on right now.

But it sounds like your primary driver to improve that margin is leverage and increased revenue. Is that right?

Yes. Revenue absolutely will help immensely.

Okay. Thank you.

Osten Bernardez from Cross Research.

The first question, when I think of the balance of how you get from the 6.8% in the June quarter and the targeted range for your gross margin for the September quarter, how much of that would be as a result of the strategic decisions you're considering versus, say, an uptick in revenue? And of that uptick in revenue, would you be able to give any type of direction as to -- do you expect it to be broad-based within components or targeted towards any sub segments there?

Yes, this is Bob. So I'll answer and Jure can add-on, as he thinks is appropriate. And again, we have to bear in mind, as I said before, we don't do segment reporting. One of the things that we had expected as revenue came back, we expected it would come back stronger on the components side. And that's typically what we've seen in the past. So this quarter, obviously we had very strong rebound in revenue overall but that was not the case on the component side.

So that is something that we're analyzing and understanding right now. That's part of why we're looking next quarter at, is there something we could do that would make sense in addition to waiting on the revenue to come back. And we may conclude that, really, there's not a lot we can do. But as I said to the last question, as revenue comes back, it's very high contribution margin. I think that's, unfortunately, demonstrated in the wrong direction right now as revenue is down in that area. But as it comes back it will generate a lot of gross profit. And we're confident we'll be able to get it growing again, just as we have on the EMS side.

Osten, I don't have any comments. I think Bob covered it.

Great. And then, would you be able to comment with respect to the outlook you have for your communications business? Earlier in the year you've commented that you were relatively bullish on a calendar second-half ramp in demand and the revenue you pulled in for the June quarter was positive and seems to be in line with what you were expecting there. Are you still confident on the full second-half ramp for the calendar year for that business?

Based on what we were hearing from our customers, and looking at the forecast and their inventory levels going on, we basically expected the second half of the calendar year to be better than the first half of our calendar year. That's what we said. And basically that's what we are saying right now. What we've seen today that we're going to have a nice improvement in September quarter. And based on everything I see today I think that should continue through the December quarter. But again we are taking one quarter at a time.

Got it. And with respect to some of the thinking in the components business, do the results you announced today, how do they change, if anything, your expansion plans in India and China that you highlighted during the last fiscal?

First of all, at this time, there's no changes in India. I would say in China, that's a center of excellence for us, for high technology printer circuit boards. We continue to focus on that and grow that. Our long-term goal is to be transitioning some more business there. That's part of the plan and as our customer demand goes up, we will be pulling more circuit board business in China. In this business, every day we look at where is the best way to put it, both from a technology point of view, cash point of view, and also the time to market point of view. So in our business, you never go to sleep. You constantly adjust to it. And I can tell you that we're in a good position to do that and we can move things around.

Thank you.

Operator, we have time for one more question.

Amit Daryanani from RBC Capital Markets.

Just two questions from me. One, could you just talk about the quarter that you guys had in June? Was the upside fairly linear through the quarter? And, secondly, was the upside fairly broad-based or was it more concentrated in a few customers?

Amit, this is Bob, so I'll answer. One of the things we noticed right out of the gate last quarter is that demand was stronger. And it held up week by week throughout the quarter. So it was really not a surprise. You never know until it's over. But it started out strong and stayed that way the whole quarter.

And Bob, was it was fairly broad-based or was there two to four customers that helped drive a lot of upside?

I would say, if I remember correctly, when I looked at our top 10 customers, I think 8 of them were up sequentially. So I would characterize that as pretty broad-based.

And, not to keep going back to the component issue, but it sounds like you're betting on revenues to rebound. And it also seems to be that inventory is fairly low in the supply chain right now. Could there be a dynamic where Sanmina may be losing market share and, even if inventories do improve, you don't get the benefit of that? Could you just maybe talk about, you're the sole source in a lot of these programs so if they do come back you win them. And then in addition, you guys have struggled in the component business for multiple years now, I think. Why not look to maybe sell or divest that business and focus on core EMS, which honestly has been very well-run for you guys of late?

First of all, I think you are analysts, you follow this industry a lot better than I do. And you know that if you look at the component, find me a circuit board company that focuses in high technology printer circuit boards today that's not hurting for their revenue. So we're going through the same experience right now. I think we're well-positioned. Our execution is better now than ever before. I think our customer is wide. I think we're a lot more picky right now which customers we want to do business long term.

So that's the focus for us, the quality of the earnings. We're not going to be chasing just revenue for revenue sake in the short term. I think we turned the corner. I think we did all this restructuring. Now we have to really focus tuning things up. And that's basically what we said. We're going to be very aggressive driving each of these businesses to make money.

Fortunately, our components are making a little bit of money, but not where they should be. And when I'm talking, I think you're strictly focused on, at least through your answers there, between the circuit board and so on. But I have some other business such as we just talked about, the memory module, the customer memory module, optical businesses. These are all the businesses. Our precision machining businesses. These are the businesses that generate a lot of margin in a reasonable market. But we just did not have a very strong demand, especially in the last couple quarters.

In this coming quarter we are not forecasting huge upside in our numbers. Now, we don't know how things are happening three months from now. But we do expect, as I mentioned earlier, that we will have some inventory correction there. And I think we're going to be in a position to do better. So that's really what we are saying.

Fair enough. Thanks a lot.

Ladies and gentlemen, first of all, thanks again for your time. I appreciate it. Hopefully we answered most of your questions. If we didn't, we're available and give us a call. With that, thank you very much.

Thanks.

And this concludes today's call. Thank you for your participation. You may now disconnect.