TTM Technologies Inc (TTMI) 2008 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the TTM Technologies financial results conference call for the first quarter of fiscal 2008. My name is Macy and I will be your operator for today.

At this time, all participants are in a listen-only mode. Following the presentation, the conference will be open for questions. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded for replay purposes. I would now like to turn our presentation over to Kent Alder, Chief Executive Officer. Please go ahead, sir.

Okay, and thank you. Good afternoon and thanks for joining us for our 2008 first-quarter conference call. I'm here in Santa Ana with CFO, Steve Richards. We delivered another quarter of solid financial performance with sequential increases in net sales, gross margin and net income.

But before we get into any details, let me mention that during the course of this call, we will make forward-looking statements subject to known and unknown risks and uncertainties that could cause actual results to differ materially from those expressed or implied by such statements. Such risks and uncertainties include but are not limited to fluctuations in quarterly and annual operating results, the volatility and cyclicality in various industries that the Company serves, and other risks as described in TTM's most recent SEC filing. The Company assumes no obligation to update the information provided in this conference call.

Also, you'll note in our press release issued today that we provide GAAP and non-GAAP financial information. Specifically, with reference to EBITDA, the reconciliation between GAAP and non-GAAP information is provided in the press release.

And now, with that, let's turn to the results for the quarter. Before Steve reviews the numbers in detail, I will provide a quick overview of the business.

As I stated earlier, we delivered solid first-quarter performance, fueled by continued strong demand for our high-tech manufacturing services as well as from our aerospace defense customers. First-quarter revenue, gross margins, operating margin and earnings per share all grew sequentially over the fourth quarter. As a reminder, we have two operating segments and we report separate financial results for each segment as well as for the consolidated Company. The PCB segment is comprised of nine operations in North America. The Backplane Assembly segment is comprised of two operations, one in Hayward, California and the other in Shanghai, China.

First, let's look at the Printed Circuit Board segment, which continued its strong contribution to the Company. First-quarter net sales, excluding intercompany sales of $148.7 million, increased 1% compared with $147.5 million in the fourth quarter. Operating segment income increased to $22.7 million compared with $17.1 million in the fourth quarter, a 33% increase. This growth in income was fueled primarily by continued strong demand for higher-tech products as well as a onetime payment from a supplier.

Price per panel increased 4%, due mainly to increases in higher technology products and changes in product mix. Market pricing for printed circuit boards remained essentially stable quarter over quarter.

Now for the Backplane Assembly segment, first-quarter net sales, before intercompany sales, were $32.6 million compared with $27.8 million in the fourth quarter, an increase of 17%. Operating income was $2.7 million compared to $1.5 million in the fourth quarter. Net sales grew due to increased demand from customers of our Shanghai facility as well as the shipment of certain orders from our U.S. facility that had been deterred in the fourth quarter into the first quarter as we discussed during our last earnings call.

Now, let's take a look at end markets. We serve four end markets -- Networking/Communications, Aerospace/Defense, Computing/Storage/Peripherals, and the Medical/Industrial/and Instrumentation/. Sales expanded significantly from the fourth quarter 2007 to the first quarter 2008 in two end markets, Aerospace/Defense and Networking/Communications. Networking/Communications increased from 40% of our net sales in the fourth quarter to 42% of net sales in the first quarter of 2008. Most of the increase came from our Backplane Assembly segment, where the majority of sales are to Networking/Communications customers. In that segment, we saw particular strength from some of the Chinese and European customers that we support through our Shanghai facility. In the PCB segment, we experienced continuing strength with our Tier 1 networking customers.

Aerospace/Defense increased 1% to 34% of sales. This increase was due to continued strength with a number of our major military customers as well as new program awards from some of our smaller defense customers. On a yearly basis, the Aerospace/Defense end market has grown from 28% of net sales in the first quarter of 2007 to 34% in the first quarter of 2008.

In the Computing/Storage/Peripherals end market, there was not much change. We did experience a slight reduction in shipments to server and storage companies in the first quarter. As a percentage of sales, this end market decreased from 13% in the fourth quarter to 12% in the first quarter.

The Medical/Industrial/Instrumentation end market represented 12% of sales, down from 14% in the fourth quarter. We do not attribute this change to a specific customer or trend. This is a highly diverse end market comprised of numerous customers. As a result, we tend to see small ebbs and flows in sales in this segment, as was the case in the first quarter. The decrease in these latter two end markets as a percentage of sales was, in part, due to the larger increases in the Aerospace/Defense and Networking/Communications end market.

Our top five customers comprise 29% of our first-quarter sales and represent a strategic mix of commercial and Aerospace/Defense customers. No OEM customer represented more than 10% of sales in the first quarter.

In alphabetical order, our top five OEM customers were Cisco, Honeywell, Huawei, ITT, and Juniper. Huawei is a new addition to the top five. They are a customer of our Shanghai Backplane Assembly operation.

Now, let's discuss our technological and operation capabilities. The average layer count of our printed circuit boards in the first quarter was 14.2, up slightly from 14.1 in the fourth quarter. Boards with more than 20 layers represented 29% of first-quarter sales, consistent with the fourth quarter. We continue to drive technology with HDI products, blind and buried vias, sequential lamination work and class three products, as well as layer count.

Quick turn as a percentage of revenue decreased from 13.5% of sales in the fourth quarter to 11.8% in the first quarter. Let me stress that the decline in quick turn revenue does not represent a decline in demand from customers for these services. Rather, it reflects an increased mix of more complex and high-tech products in our quick turn facilities. These products have more process steps and the longer cycle times exceed our current quick turn measurement of ten days or less. Therefore, we are producing quick turn products that do not qualify as quick turn because of our strict ten-day rule. Overall, the quick turn market is stable.

Leadtimes have decreased somewhat since the end of 2007. Leadtimes for our commercial customers range from four to six weeks while leadtimes for our Aerospace/Defense customers are at six to eight weeks.

At the end of March, our PCB book to bill ratio was 1.04. That compares with the IPC book to bill ratio of 1.0. As we expected, we remain above the industry average.

While we can always improve, we are excited about the progress in constantly driving top line and improving margins. Results for the first quarter were an improvement over the fourth quarter. We expect market conditions in the second quarter to be fairly stable. As always, we will continue to operate efficiently and effectively with a customer focused strategy to grow our business and create value.

Now I'll turn our review over to Steve to review the financial performance in the first quarter and discuss our outlook for the second quarter. Steve?

Thanks, Kent. As you saw the press release, TTM reported solid results for the first quarter of 2008 with continued sequential improvement in every financial metric. Strong demand from network communications and Aerospace/Defense PCB customers, as well as an increase in Backplane Assembly revenue led to improved first-quarter net sales of $174.1 million, an increase of 3.9% over last quarter.

We continue to see gross margin improvement in the quarter, primarily due to higher levels of work-in-process inventory, which increased significantly at a number of our plants toward the end of the quarter. First-quarter gross margin of 21.6% increased from 20.7% in the fourth quarter.

Net income of $14.4 million reflected an increase of 21.5% over the fourth quarter. And diluted earnings per share of $0.34 increased over fourth quarter's diluted earnings of $0.28 per share. As we said in the press release, we recorded a onetime benefit of $3.7 million in operating expenses attributable to a reconciliation of past year's metal reclamation expense that positively affected results for the first quarter. This onetime benefit added approximately $0.05 to the diluted earnings per share for the quarter.

Selling and marketing expense for the first quarter was $7.7 million, essentially flat with fourth-quarter expense of $7.6 million. As a percent of sales, selling and marketing expense declined from 4.6% of sales in the fourth quarter to 4.4% of sales in the first quarter.

G&A expense, including amortization of intangibles, for the first quarter was $9.2 million or 5.3% of sales. This compares to fourth-quarter G&A and amortization expense of $9.5 million or 5.7% of sales. The decrease in general and administrative expense was primarily due to lower accounting and consulting expense recorded in the first quarter.

In the first quarter of 2008, we incurred stock-based compensation expense of $991,000. 69% of the expense was recorded in G&A, 24% in cost of goods sold and 7% in selling and marketing.

Operating income of $24.4 million for the first quarter increased 39.2% over fourth-quarter operating income of $17.6 million.

First-quarter interest expense, including debt amortization costs, decreased to $1.8 million compared to $2.7 million in the fourth quarter. During the first quarter, we paid down $10 million of debt, which brings our debt level to $75 million. Our operating cash flow is robust, and, as we have noted in the past, we're focused on reducing leverage in order to keep all of TTM's growth opportunities available. We expect to continue our trend of reducing the debt level throughout 2008. In fact, we reduced debt by an additional $11 million during the month of April.

Our effective tax rate in the first quarter was 37.2%. First-quarter net income of $14.4 million, or $0.34 per diluted share, increased 21.5% over fourth-quarter net income of $11.8 million or $0.28 per diluted share.

TTM's EBITDA growth continues to be significant. EBITDA for the first quarter was $31 million or 17.8% of sales compared with fourth-quarter EBITDA of $24.4 million or 14.5% of sales. For your reference, there is a reconciliation of this non-GAAP measure in the press release.

We continue to maintain a very strong balance sheet, excellent cash flow and a very manageable debt position. Cash and cash equivalents at the end of the first quarter totaled $32.6 million compared to $18.7 million at the end of the fourth quarter. Cash flow from operations was $26.8 million for the first quarter. Net capital expenditures were approximately $3.5 million and depreciation was $5.3 million.

Looking ahead to the second quarter of 2008, we project revenue in a range of $170 million to $177 million and earnings in a range of $0.20 to $0.25 per diluted share. The gross margin percentage for the second quarter is expected to be in a range from 19% to 21%. While we anticipate that gross margins will be flat to down, our guidance is neither a sign of softness in our end markets, nor indicative of weakening demand. Rather, it reflects an anticipated reduction in the work-in-process inventory that I mentioned in my earlier remarks.

We expect that selling and marketing expense will be approximately 4.4% of revenue, and that G&A expense, including amortization of intangibles, will be approximately 5.5% of revenue. The reduction in our debt balance, as I mentioned earlier, will result in interest expense, including debt amortization costs, of about $1.7 million as we continue to repay debt in the second quarter.

And lastly, we expect our tax rate in the second quarter of 2008 to be approximately 37.5%.

With that, let's open the call to your questions.

(OPERATOR INSTRUCTIONS). Kevin Kessel, Bear Stearns.

I was just curious, in terms of the Networking and Communications strength that you saw in the quarter, can you just give us a little bit more context? I understand that the Backplane business was -- saw some improvement as a result of I think some of the delays you said that were worked out. But in general, what is the overall -- is there an overall trend that you see still within that group and does it continue? Or did you sense any onetime kind of upside?

That's a good question, Kevin. And as you know, for the quarter, most of that increase in the first quarter was driven by the Backplane Assembly. But our Printed Circuit Board segment also had some I guess reduced choppiness, if you will, in that quarter. And here we are into the first part of Q2, and we're starting to see some more strength in that end market segment; so a little bit of choppiness with the Printed Circuit Board portion of that end market, some strength headed into the second quarter.

So as we look forward in the second quarter, I believe we will see more strength in the Printed Circuit Board side of our business, but less going into the Backplane Assembly.

Okay. And then -- but at the end of the day, is there any rhyme or reason to the delays that occurred in Backplane which weighed on the Company the last couple of quarters versus this quarter where things seemed to open up?

I think in the Backplane, that's where the delays were. If you're referencing the delay we had in the fourth quarter that we shipped out in the first quarter, yes, that was with two particular customers. And that was more in the Backplane area, where some components were late coming and the product shipment was delayed. And they were fairly sizable orders that were waiting for some parts to arrive. Once they arrived, we shipped those out -- and we shipped those out in the January timeframe, so right after the end of the quarter.

Very good. And then from the Medical/Industrial segment, that one, down double digits here. Any -- a lot of that I think is what you're doing in Redmond, but I know there's probably other facilities involved of course there. What's driving that weakness? Is it one of those particular end markets or is it broad?

It's pretty broad, Kevin. When you look at our customers in that particular end market, there are really no major customers that dominate that market. It's a high mix of customers. And so these kind of fluctuations up and down just happen periodically, not driven by any one particular customer. It's just when you go through and add up all the customers, we were down a little bit.

I don't think that's indicative of a pattern. I don't think it's any cyclicality. If there is some cyclicality in there, which I'm not sure, it will come back to us, so I think that's fine. I'm not too worried about what's going on in that particular end market. I think it's one that just very broad timing of orders, those kind of things.

Okay. And then just lastly, anything in terms of an update around Asia and the outlook for expansion over there?

Yes, there's probably a lot of changes going on in Asia right now. On the cost side of the formula, you've got some waste treatment costs going up; restrictions on water; labor is increasing; the tax rate is going up; the exchange rate is moving in our favor. So a lot of changes going on over there that are helping us as we research opportunities to expand our business into Asia.

We've talked before about the process we're going through. We've looked at numerous companies, continue to narrow our list down to a few qualified candidates, in our minds, that we believe would be good fits. But we are still in conversation stages and quite a ways away from having anything secure to announce.

We do believe that as we look at our Company and the solid position that we have in the U.S., we are looking that as the next step would be an expansion into Asia. We're being very cautious; want to do that right; want to have the right candidate, the right formula; and that takes a little bit of time to do that.

So the other comment I have on that, when we look at potential candidates, we want somebody that is running well, not a fix-up that fits our technology. So we're making good progress there, and we're certainly trying. It just takes a while.

Shawn Harrison, Longbow Research.

On the Backplane Assembly business, how much in terms of a dollar amount were the delayed shipments in terms of a contributor this quarter?

They're about $2.5 million.

Okay. And then, looking at the PCB Manufacturing business, how much of a gross margin benefit was received this quarter from the buildup of work-in-process inventory?

Probably about 1% to 1.5%, Shawn. So on an adjusted basis, our gross margin would probably be more in the 20% range.

Okay, and then that should -- as we head into the third quarter, if it ticks down here in the second quarter, probably normalizes unless you see a similar experience in the back half of the second quarter?

Right, and that's a bit hard to predict. But our work-in process inventory Company-wide increased by $5.6 million over the fourth quarter. We don't expect all of that reverse out in second quarter. Honestly, the nature of our work now is a bit more complicated, more process steps involved, usually higher material content, all those things are contributing to the increased value of WIP. So I think we'll probably see the WIP levels come back down in Q2 and maybe in Q3 as well.

Okay. And I'm assuming a lot of this WIP is tied to the growth you're seeing in the Military/Aerospace markets?

Absolutely right. Both on the PCB side, as well as in the Aerospace/Defense assembly operations too.

Yes, Shawn, as we execute on our strategy and drive our higher-tech business and we drive our Aerospace and Defense business, that's inherently higher material cost, spends longer time on the floor so you can anticipate that WIP will go up. And it kind of varies, but we had a quarter where it went up pretty dramatically. And that size a jump won't continue, but you will probably see it fluctuate a little more in the future as we move our Company to some of these more profitable segments.

Okay then, a couple of quick follow-ups. Any change to the CapEx forecast this year?

No, it's hanging in about $25 million, $23 million to $25 million.

Okay. And then I know, Steve, you mentioned interest expense at about $1.7 million. Should I assume interest income is still around $270,000, $280,000, something like that?

I would say honestly, as even with today's rate cut, we're seeing rates fall. So I expect more like the $150,000 to $200,000 range. Obviously, we are building up cash, but we also are using that cash to pay down debt. So interest income is a pretty small piece of the puzzle for us.

Do you think you'll pay down any more debt this quarter?

Yes, I think we probably will. It will kind of depend on the cash -- the capital expenditure requirement, because certainly we had a pretty small CapEx in the first quarter. But I think probably it's reasonable to expect us to be down another $5 million to $7 million beyond the $11 million we've already paid down in April over the course of this quarter. So probably for the full quarter, $16 million to $18 million of it.

Okay. Thanks a lot. Nice quarter, guys.

Amit Daryanani, RBC Capital Markets.

A question on the guidance here. Looking at essentially flattish sales in June, I know you spoke about the Networking segment potentially doing a little bit better especially in the month of April so far. Could you just talk about the other few segments and what you expect to see sequentially in them?

The other two end markets?

Yes, or the other three end markets, I guess.

Well yes, Aerospace and Defense is one that we really have a lot of opportunities in. We see that that, as a way to drive our margins up, and so we are expanding some of the Aerospace/Defense products into other facilities more than just our historical Aerospace/Defense facilities. And as we execute on that strategy, I think that's going to continue to do well and probably increase as a percentage of our sales.

Looking at some of the programs that we have won, some of the successes that we have had, I'm pretty safe to say that that will continue to grow for us.

On the Computing/Storage/Peripherals, I don't see that that's going to grow too much for us. Within that segment, you have a little more volume-oriented product, so it's a little more price competitive. And if you look at our strategy of higher-tech aerospace defense, high-mix, low-volume, there's fewer opportunities within that end market, so that will probably stay flattish over time and maybe decrease because we are increasing in the other end markets.

The Medical/Industrial/ and Instrumentation, we've had two quarters in a row where that has been down a little bit. I don't -- there's nothing within that end market that we can hang our hat on, because like we said, it's pretty diverse. Very broad customer base, a lot of small customers, a lot of part numbers; but still would anticipate that that should have some increase over the next couple of quarters, simply because it's been down a couple of quarters. And there's nothing that says it will continue.

Thanks, that's helpful. And then just looking at the commodity prices, commodity prices have gone up quite a bit in Q1. How should we think about that eventually impacting you guys? And given the fact that we have more Aerospace/Defense business today than ever before, does that make pricing a little bit easier?

As far as the -- it helps a little bit on the pricing because you are looking at fewer part numbers. From the standpoint that you're looking at longer-term programs, maybe it's a little more challenging.

But on the cost side of the equation, on our material costs, we don't anticipate any increases this quarter. And any increases that we do get are basically around the price of metal and gas. So where that takes us in future quarters, not quite sure.

I think one point to remember out of all these material prices, we've over the last couple of years, we've had quite a number of material increases, and we've been able to either pass that on to our customers or control costs or adjust our business accordingly. But you can look at our margins as we have absorbed all these material price increases and still manage through that. So I am confident that we will be able to manage through in the future, just like we have in the past.

Got it. And then just looking at Huawei, one of the new top five customers, it sounds like your relationship is more Backplane Assembly driven at this point. Is there a way to expand that to the PCB side of things, or do we need to double up our presence in Asia to get there?

Yes, I think you are right, that is totally Backplane related. And for us to supply any circuit boards there, I don't think it's a good fit because there's a little more volume and the technology on the circuit board side doesn't fit for us. But as far as a customer, they are a pretty valuable customer; biggest customer, obviously, in Shanghai with a lot of growth potential. So we're pretty excited about that particular customer and where we're going with that customer and others in Shanghai. Shanghai has some pretty nice prospects for us.

Just my last question and I'm going to hop off after that. Steve, about $8 billion uptick in inventory. I may have missed this, but how much of that was because of the increasing work in progress?

Sure. Of the $8 million increase in inventory, $2.1 million was an increase in raw materials and about $200,000 in finished goods; and then so $5.6 million was due to WIP.

Fair enough. Thanks a lot and good job on the quarter, guys.

Matt Sheerin, Thomas Weisel Partners.

Just to follow up on the questions of gross margin. So, do you think that you can get -- just wanted to clarify this. Do you think you can get back to the 21% and plus range in the September quarter, given the issues this quarter with the WIP?

Yes, I think it's reasonable, Matt. I think, you know, we've talked in the past about gradually over time through operating efficiency improvements increasing our gross margin from the kind of 20%-ish to 21% range it has been lately beyond that. And I think that's still a reasonable goal for us. I think we just saw kind of a surge this quarter due to WIP. I think we may see a bit of a retraction in Q2 and then from that point on, we will continue to see pricing, further margin expansion, all, of course, depending on the market conditions at the time.

Matt, let me just add, just on a maybe a little higher level. When I look at our business in Aerospace and Defense and see that growing, about 70% of our business in the Aerospace/Defense is tied directly to military. And these are like radar, navigation, communication type programs that we see have some pretty nice growth attached to those, and growth with or without the Iraq war, if you will. So we're pretty excited about that, and that helps our product margins.

Some of the programs we've got in the Networking/Communication, over time, are a little more higher mix, lower volume, but they are higher technology higher mix, lower volume; and that's usually more profitable for us, because that fits right in with our strategy and our business model and how we've designed our business. So I think there are some nice things on the sales side that will help us get those margins up.

And then, of course, on the cost side, we're running pretty efficiently right now. There's always room. But when we start to look at some of our overhead expenses and compare those with last year and all the progress we made on SOX and the audit, we don't have all of those integration confusing issues this year. And I think we'll do a better job managing our costs on that side of the equation too.

Okay, great. And then regarding the Backplane business again, you had obviously a very nice boost in operating margin quarter to quarter. Was that just a function of the utilization rate and the higher volume of business? Or was there a different mix? And should we expect, given that -- it sounds like business is going to be down a little bit there -- is it going to be more negative leverage just as there was positive leverage?

Actually, Matt, the mix of work I'd say was the biggest driver for the Backplane Assembly improvement. We had some work this quarter, particularly in Shanghai that was a bit lower material content as a part of the overall mix, so that helped a lot.

I think that we only expect the Backplane Assembly operation to be down about $1 million in sales in Q2 over Q1. So probably, and we were at $32.6 million for Q2, probably mid-$31 millions for Q2. So I don't expect to see much of a retraction, if you will, in margin for that business in Q2.

Also, keep in mind, that business does not have the kind of operating leverage effect that PCBs do because so much more of the cost is reflected in direct material content.

Okay. That's helpful. And then, Kent, just on the overall business, you are guiding basically flat, up a little bit. Year-over-year comps are certainly easier because I know you went through issues with the Cisco lean and other things last March and in June, so you've got some growth rate. But you are basically more or less stable right now, which is probably a good thing considering what other suppliers and OEMs are saying. But what is your general feel about kind of the cycle right now and your sense of where we are headed as we get closer to the back half of the year?

Yes, I think, Matt, we had a really good first quarter. I think the next quarter, although it's a little flat on the top line, nothing is a straight line up, but we're kind of into a little bit of a retrenching and adjusting for some of the changes that we're going through with more higher tech and military aerospace. But overall, I think we are very well-positioned.

And we keep hearing on the macro level all the negativity that's out there and some even use the R word, but we're doing very well. And our conversation with customers and suppliers I think continue to tell us that if this is the bottom of a cycle, and I never predict the bottom, we're doing quite well for the bottom. And every one of our facilities with the capacity utilization and the positions that we are in and the investments that we've made, if the market were to turn and be more robust, we could see some very nice returns as we participated in that.

So from a -- I guess from our customer and our TTM viewpoint, where we see the marketplace, it's a little tough, but it's not bad, and we are continuing to evolve our Company into the more profitable segments of this marketplace.

Okay. And Kent, do you think that you are getting or do you know if you are taking any market share or gaining share from some customers -- I mean sorry, some of your competitors because some of them had some issues? Has that helped at all?

I think we have positioned our Company to be able to compete very nicely on a global basis. And I think we are winning some market share. I look in reference to the book to bill ratio at 1.04 for TTM, 1.0 for the industry. So I continue to feel very positive about our business or about our Company and our ability to compete and win business in this marketplace.

And you said 1.04 for March. Could you tell us what it was or what it is now?

I don't have that for April. We just wrapped the month up, so I haven't looked. But I guess, Matt, there hasn't been any major swings in our business one way or the other in March. And in fact, we're off to a fairly nice start in -- excuse me, in April, we're off to a fairly nice start in April.

Okay, thanks a lot.

Rich Kugele, Needham & Company.

Thank you. Just a couple questions. First, when you look at your leadtimes, can you point to how much of the improvement in leadtimes or I guess the shrinking of leadtimes was due to some of those investments you've been making in past quarters on some of your bottlenecks, versus I guess just demand oriented?

The backlogs have grown a little bit, but they are more spread out, so that's helpful in us managing the business and it's also helpful in the slightly decreasing leadtimes. But our leadtime reduction, it's -- it's still within like a margin of error that it is not a big deal to have it fluctuate this much one quarter over the next.

And leadtimes are -- it's kind of interesting. As we evolve the Company to higher tech, more profitable work and more Aerospace and Defense, leadtimes today are a little bit less uniform than they have been in the past when we can say for a four-layer board, it's three weeks, and it just totally depends on backlog. Now our leadtimes vary depending on the type of product that we get in here.

Some of these higher-tech products that we've got that go through the front end of our shop four and five and six times, they take us almost twice as long to build or there's twice as long -- they spend twice as long on the floor because there's that many more process steps to go through. So that impacts the leadtime; it impacts our capacity.

But our $25 million that we are investing this year in CapEx is targeted almost exclusively on the higher-tech products that we have demand for.

I might mention too that when you look at our quick turn facilities, our quick turn facilities are able to see the technologies probably before some of our standard leadtime. And as they see those quick turn, higher tech products, we aren't -- what we need to do strategically is move that technology to our other facilities so that we can free up our quick turn facilities with a little more quick turn capability.

So right now, as we go through this somewhat of a phase of moving towards more higher-tech products, we are seeing a little bit of some bottlenecks in our quick turn facilities. So looking forward, kind of back to a prior question, when we look at some margin improvements, one of the challenges that we have and opportunities is to move some of the technology to other facilities and get back to a little higher percentage of quick turn.

That's helpful. And then in that vein, when you look at the WIP, specifically the Defense and Aerospace side, should we just assume then that some of those orders came in towards the end of the quarter somewhat? And so you really had no choice? And that that could happen again until your CapEx can properly address that?

Well, our CapEx will take care of some of that, but not all of that, because there are some products that just have two and three times as many process steps, and they are just going to go through our facilities and spend more time in our facilities that's going to build up our WIP number before we can ship those out.

Has that manifested itself in your pricing to them?

Yes. We get higher prices for the additional steps. And of course, our costs are higher too because of additional steps. But you look at the spread between our costs and what we're able to sell those products for and they are more profitable.

Okay. And then just lastly, all else being equal, we would probably assume that because PCB is going to be stronger than Backplane in the June quarter, that your gross margins normally would have been higher, but it's because of this WIP that they're not, right? Just in a vacuum?

By and large, Rich, the guidance we have for Q2 gross margin of 19% to 21% is largely impacted by the WIP reversal as opposed to say a change in market conditions.

Okay, that's great. Thank you very much.

(OPERATOR INSTRUCTIONS). Kevin Kessel.

Just a quick follow-up. Steve, on cash flow for the year, obviously, it was much higher than expected here for the quarter. I think you guys came in looking for something like $14 million to $18 million. What do you think is -- what sort of a range do you think is possible or targeted for 2008 as a whole?

Certainly, taking first quarter and annualizing it probably is too high. Certainly we had a $3.7 million cash payment in this cash flow. So if we drop that out, we are at $23 million in cash for the quarter. And we also saw some big pickup this quarter in accounts payable. And I'm not sure what will occur in the future. So I think we're probably more likely at a run rate of say upper teens going forward, so I would probably say 18 to 20 Q's two through four, let's say. Of course, we don't give P&L guidance beyond one quarter, so it's all going to depend on how the market turns out.

But I think kind of tapering back our cash flow from this quarter and extrapolating from there is probably a wise idea.

Okay. And then in terms of the computing market, I think that you mentioned, Kent, that servers were a little bit weak in the quarter. And I think overall the segment was down. I'm just curious about that because I think that that seems to be the one area that some of the others so far that have reported throughout the supply chain have actually cited it as an area of stability for the most part, occasionally even strength. So I'm just curious what you guys are seeing there. Is there additional potential volume going to Asia like it had been in the past that was weighing on that segment or is it just part number related or what is it?

I think it's just the particular products that we serve, programs we're involved with. There's really no major trends or changes going on.

And we're going from 13% to 12%, but it's almost, if you take the rounding out of there, we are just not down that much, so it's not really much of a change. And if we'd have had just a few more shipments there, we could've almost said it's flat. I mean it's that close. So there's not that much change going on. I wouldn't read anything into any major changes because we're down 1%. It's just a real fluctuation of some of the particular programs that we're involved in.

Okay. But as far as the Asia stuff goes, that hasn't -- you haven't seen that accelerating or discussions like that reignited with customers that might have been engaged in that activity in the past?

No, we haven't. We keep talking about Asia. We've been competing on a global basis since 2001, 2002. So I think the products we are involved in, the facilities that we have with the high mix low-volume focus and this technology, I think we compete very nicely with the Asia competitors, the rest of the United States competitors and just compete very favorably on a global basis.

I got it. And then just lastly, on the quick turn that you mentioned earlier, just the explanation there for the percentage decline, if I understand that correctly, what you were saying, you are saying that certain business that maybe in quarters prior was categorized as quick turn with certain customers because it was ten days or less, that exact same business has, for whatever reason now, that they want additional steps, they are adding certain things to the overall requirements; and as a result, that actual business that was, at one point quick turn for you, has now shifted up and out of the ten-day range?

No, not exactly, Kevin. We are saying that we're doing more high-technology products. And some of these high-technology like the blind and buried vias, sequential lamination, HDI; instead of taking four days to build, they take eight days to build; or instead of five days to build, it takes 12 days to build, because you have additional process steps to go through. Like it will go through our lamination cycle five and six times and our plating cycle five and six times. So you got one panel that goes through your front part of your process five times, the back part once. Where if you go back three years ago, prior to that sequential lamination, it would go through the front end of the shop once, back end of the shop once and then ship.

So we've got this product going through the front end of our shop several times, and we have one product that goes through nine times in the front end before we ship it out. So that's where our CapEx is going, is to alleviate some of those bottlenecks that facilitate that higher tech. And that's why our WIP is going up because it stays in our process longer. And that's why the ten-day calculation for quick turn probably isn't as valid as it was in the past.

Yes, I was just about to say that just goes to the definition of ten-day.

Exactly, thanks.

Because then at the end of the day, if technologies have changed that much, or you're seeing that now across your customer base, then maybe the metric needs to be something that's more relevant.

Yes, we have worked on how to come up with a metric that's relevant; and it's a little more complicated than just saying 15 days or less because now we're into a lot of our standard products. So how we measure this, I think, is -- we're going to work on some better systems to clarify this as we adapt to some of this higher-tech work. But clearly our ten-day rule and less is a little obsolete. But until we find something better, that's what we're going to roll with.

Okay, but the point at the end of the day is this sort of higher-tech -- high-technology products that you're working on that might for, in many cases, go for ten days, you are still getting paid that perceived quick turn premium that you would be getting for something that you are doing on a three-day or 24-hour turn?

Yes, that's correct, Kevin.

Got it; thank you.

(OPERATOR INSTRUCTIONS). And there are no further questions at this time. I would like to turn the call back over to Mr. Alder for any closing remarks.

Okay, I would like to thank everybody for joining us today on our conference call here. We appreciate your interest in TTM.

As a reminder, we're having an analyst day May 22 in New York, where Steve and I and additional management team members will be presenting. That will give us an opportunity to talk about TTM in a lot more depth and be able to show you where we're going. So we look forward to seeing a lot of you May 22 in New York. Thanks for your interest. See you next quarter.

Thank you, sir. Ladies and gentlemen, this does conclude today's conference call. If you would like to listen to a replay of today's conference call, please dial 303-590-3000 or 800-405-2236 with access code 11112623 followed by the #. We thank you for your participation and at this time, you may now disconnect.